Advertisement
retirement

The Cost to Crack Your Nest Egg

Whether you're an early bird or a late bloomer when it comes to saving for retirement, don't scuttle your plans by raiding your nest egg prematurely.

Most 401(k) plans allow participants to borrow up to half of their account balance (but not more than $50,000) and repay the loan over five years. But that can take a big bite out of your future savings because any money you withdraw loses the power of compounding.

In addition, if you change or lose your job, the loan is due immediately. Fail to repay it and the money will be treated as a distribution that is subject to state and federal income taxes, plus a 10% early-withdrawal penalty if you are younger than 55. Some plans offer hardship withdrawals that do not have to be repaid, but they're still subject to taxes and a penalty that can wipe out up to half of your distribution.

Advertisement - Article continues below

You can't borrow from a traditional IRA, but you can withdraw your money at any time. However, you'll pay taxes on the withdrawal and, if you are younger than 59, a 10% penalty, too. If you have a Roth IRA, you can withdraw your contributions (but not the earnings) at any time tax-free and penalty-free.

Gregory Dyson, senior vice-president of marketing for ICMA-RC, which provides retirement-related services to state and local government employees, gives this example of the long-term impact of premature withdrawals.

Let's say you are 35 years old and have a retirement-account balance of $30,000. If you take a $15,000 hardship distribution, it would cost you more than $122,000 in lost savings over the next 30 years, assuming an average annual investment return of 7%. "That's a very high price to pay for a short-term fix," says Dyson.

If you're really squeezed for cash and feel you have no choice but to cut back on your savings, at least try to contribute enough to capture your employer's match. Otherwise, you're walking away from free money.

A recent evaluation of nearly one million 401(k) participants by Financial Engines, a leading provider of investment advice and managed accounts, shows that one-third of workers failed to contribute enough to capture the full company match. With depressed stock values, you'll have the added advantage of being able to buy more shares at lower prices.

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
Where You Should Invest Now
investing

Where You Should Invest Now

Kiplinger.com senior investing editor Kyle Woodley joins our Your Money's Worth podcast to answer investor questions about tech stocks, the election a…
September 22, 2020

Recommended

HSA Limits and Minimums
health savings accounts

HSA Limits and Minimums

Annually adjusted contribution limits and other requirements must be met if you're covering health care costs with a Health Savings Account.
September 21, 2020
Don’t Be Paralyzed by Uncertainty
retirement planning

Don’t Be Paralyzed by Uncertainty

You definitely need a plan, because what’s ahead could be scarier than what’s behind us.
September 21, 2020
Insurance for Long-Term Care at Home
retirement

Insurance for Long-Term Care at Home

In the wake of COVID-wracked nursing homes, increasingly more people are looking at options to age in place with long-term care insurance.
September 17, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020