Everyday Cheapskate: 5 Reasons You'll Quickly Regret Raiding a Retirement Account
I know it's hard. I know you're desperate. You're stressed and losing sleep. Things are tough. You have to do something, and soon. But whatever you do, don't touch your retirement account. Don't borrow against it. Don't withdraw from it. Just leave it alone.
What's so bad about liquidating a retirement account? Here are five reasons you'll quickly regret doing that:
Your retirement account, even during times when it appears to be losing value, is money you are going to need when you reach retirement age. And I can guarantee you are going to need it much more then than you do now. If you bleed it dry now, you stop the momentum -- the pace at which it is growing. Think of your retirement account as completely out of your reach for now.
This is huge. The penalty for early withdrawal (before you are 59 1/2) is severe. You will lose 10% right off the top. If you don't think that is significant, you are not thinking straight. Calculate how long you will have to work and contribute in the future to make up for this loss.
If you think you're losing sleep now, just wait until you owe back taxes on a retirement withdrawal. You have to pay income tax on the entire amount all at once -- both federal and state if you live in a state that taxes income. Let's say you cash out a $50,000 retirement account before age 59 1/2. You will get a check for $45,000 (the 10% penalty is collected before distribution). Then you should expect to pay about $16,000 in taxes, leaving you $29,000 of the original $50,000 and nothing left for retirement.
4. Loss of exemption
The New York Times reports, "A unanimous Supreme Court on Monday ruled that federal bankruptcy law shields individual retirement accounts from creditors ... the same protection in bankruptcy that higher-paid workers receive for their 401(k) plans and company pensions." That decision boosts protections for the nest eggs of millions of people.