Cashing out your retirement savings account could be your most costly option. It is not uncommon for individuals to be left with less than ½ of their account, after income taxes and penalties.
Check out our Spend it or Save It Calculator to help determine the potential impact of choosing to withdraw your balance.
- You can use the money as you wish, for example to pay off existing debt, bills or other expenses.
- If you have made after-tax contributions (other than Roth contributions) you will be able to take these amounts tax-free (you will be required to pay tax on the earnings on those amounts, however).
- If you have employer stock that is substantially appreciated, there may be significant tax advantages in taking a distribution of those shares. Check with your tax advisor.
- You will owe federal (and possibly state) income taxes on the money you withdraw. The government requires 20% withholding for federal income taxes, so the amount you receive will automatically reduced. Also, the withdrawn money could put you into a higher tax bracket, and you may owe more taxes.
- If you are under age 59-½, you would also owe a 10% early withdrawal tax penalty, in addition to the income taxes.
- Once you have spent the withdrawal, you will need to begin saving for retirement again, but with fewer years left to save – and without the spent savings, it may delay your retirement date or result in a lower standard of living in retirement.
Again, we encourage you to check out our Spend it or Save It Calculator to help determine the potential impact of choosing to withdraw your balance.