Profitt Report: What happens when you withdraw from your retirement account early

Photo credit: MGN

If you’ve been putting money away into a retirement account for a few years, it can be tempting to dip into those funds. However, withdrawing from your 401(k) or IRA early usually means penalties.

The penalties can be significant: Forbes reported that Americans paid an estimated $5.8 billion in penalties on retirement account withdrawals on their 2010 tax returns.

It’s ultimately your decision: but you should know what you’re paying before making it.

“We’ve never touched it and now we get to reap the rewards,” said Joy Hurt while on a trip to Frankenmuth.

Joy and her husband Robert just retired five months ago and now, they’re living their dream.

“We’ve been to all 50 states and 13 countries,” she said, “we have no children and we've been married almost 36 years and that's what we like to do, that's our life.”

However, it hasn’t always been this way. Joy remembers a time when retirement and vacations seemed a lifetime away and they considered taking money from retirement early.

“He (Robert) lost his job in 1992 and we had no income, but it was going to be such a penalty, we were going to lose at that age, almost half of what we had in there,” Joy said.

So they dealt with it the best they could and Joy is glad they did.

Financial professional Mindy McIntosh in Freeland agrees: early 401(k) or IRA withdrawals aren’t worth the penalty.

“If you withdraw prior to 59.5 (years-old), you are going to receive a 10 percent IRS penalty,” said McIntosh.

Plus, you’ll be paying taxes on the money. So say you have $20,000 you want to withdraw. McIntosh said if you do it early, you’ll only have $12,000 due to taxes and fees.

“Whereas if you just let that grow, at 60 (years-old) you have $80,000 inside of that account,” McIntosh said.

There are certain circumstances where you can withdraw early without a penalty, depending on what kind of account you have, such as being a first-time home buyer or a large medical debt.

If your employer offers it, a loan might be an option, too.

“We have many clients who have taken policy loans from their 401(k) and then they have a loan percentage they usually have to pay back so it's more like they're working as their own bank,” McIntosh said.

However, make sure you understand that loan completely. If you stop working there shortly after taking the loan, you might need to pay it back quickly.

The Profitt Report wants to hear from you - please send consumer questions and story ideas to

close video ad
Unmutetoggle ad audio on off