Too Fast

Americans are paying billions in early retirement plan withdrawals

According to data from the IRS, Americans are struggling to avoid early withdrawal fees from their retirement accounts. Maxing out your 401(k) is one of the best retirement savings strategies available to you, but if you tap into the account too early, you’ll pay dearly.

CNBC reports that Americans currently have about $5.9 billion invested in 401(k) plans. That sum represents about 20 percent of the total savings accounts used by Americans. If you need to access your 401(k) funds before you turn 59.5 years old, you’re typically getting hit with a 10 percent fee plus taxes. The exceptions? Withdrawals for education, buying your first home or suffering from large medical debt.

As a result of those early withdrawals, the IRS raked $5.7 billion in penalties from retirement plans in 2017 (the most recent data available). As CNBC notes, that means Americans collectively claimed about $57 billion from their 401(k)s too early. Broken down even further, the average fee paid by a person taking out funds too early was $1,107. That’s a big chunk of change. When you make an early withdrawal, not only do you get hit with those fees, there’s an opportunity cost as well. Every dollar you take out means less dollars to earn interest.

Clearly, you should avoid making early a withdrawal from your 401(k). Instead, if you absolutely need some cash, try taking out a 401(k) loan. They’re tax-free and need to be paid within five years with an interest rate based on your 401(k). If you have a Roth IRA, you can withdraw funds at any time without fees. Do your best to avoid early withdrawals from your 401(k). You don’t want to get hit with fees just for asking for your own money.

Chris O'Shea

Chris O'Shea