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Equifax Explains the Costs of Early Retirement Withdrawal

September 30, 2014

retirementIf you’re saving for retirement or have an emergency fund set aside, it can be tempting to use a portion of that money before it’s time for a variety of reasons. Whether you’ve found the perfect vacation home to purchase for your family or would like to take the Mediterranean cruise that you’ve always dreamed about, it is a bad idea to tap into your retirement savings early.

According to the Equifax Finance Blog article, “

Why You Shouldn’t Withdraw Your Retirement Funds Early,” any income withdrawn from a retirement account will be taxed by both the federal and state government. In addition, you will likely face early withdrawal penalties if you’re under the age of 59.5. These penalties include a 10 percent tax by the IRS, as well as additional state taxes.

When you withdraw funds from a retirement account, the plan administrator is required by law to withhold 20 percent of the distribution to help cover the taxes owed to the IRS. You will still be required to pay taxes on the withheld amount, and it is generally not enough to cover all of the taxes. When tax season rolls around, you will have to pay the remaining balance on the federal taxes, as well as the full amount of the state taxes.

All in all, withdrawing funds from your retirement account early can wind up costing you more than 50 percent of the amount you originally withdrew. And, by withdrawing those funds early, you are less that amount of money to live on when you do retire.

For more information on alternative sources of funds, read the full post on the Equifax Finance Blog website.

Categories: Economy AOI, Education

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Courtney Rogers

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