Early Retirement Withdrawals? Is it Worth it?

It’s common for clients save for retirement throughout their entire working career. Individuals who are fortunate enough may spend decades contributing to their IRAs and 401(k)s. The need to access retirement savings for one reason or another is also extremely common even well before the client has reached retirement age. Life is unpredictable and expenses can pile up—especially in the wake of a busy holiday season. However, early access to retirement funds is limited and can also quickly become expensive. It’s critical that clients who are considering tapping their retirement savings before reaching age 59 ½ understand the IRS rules on early withdrawals—and the significant penalties that can apply for both early IRA and 401(k) withdrawals.

Early Withdrawal Penalties: Basic Rules

Most clients know the basic rules governing retirement plan withdrawals. Taxpayers are entitled to contribute a limited amount of pre-tax dollars to their 401(k)s and IRAs each year, thereby reducing tax liability. To encourage those individuals to save the funds until retirement, a 10% early withdrawal penalty applies if the client starts withdrawing funds before reaching age 59 ½.