The IRS collects $6 billion every year in penalties from people pulling money out of their 401(k) early. Avoid being one of these people at all costs.
How does a 401(k) work? You get a tax deduction when you make a contribution. The money grows tax deferred. You can take it out without paying a penalty once you turn 59.5 years old. So, you should not plan on spending any of this money until you retire.
If you have an old 401(k) plan, roll it over to a Rollover IRA or to your new employer’s 401(k). That way you can avoid taxes and penalties and the money will continue to grow tax deferred!
You might be thinking who cares about “tax deferred growth”. Give me the money now! BUT, putting it a different way, cashing out even a relatively small dollar amount can translate to being forced to delay your retirement by years.
Are most of these withdrawals coming from hardships when people are desperate? Probably not considering the IRS generally allows for a hardship withdrawal without assessing the penalty.
In our example, $10K compounded at 10% for 30 years will turn into $76K, after factoring in 3% inflation. Your situation will be different, but no matter what the numbers are, even a small dollar amount withdrawn today can put a big dent in your retirement savings.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Vivi & Shane
