The Pros and Cons of Taking Out Retirement Early

Learn what your early retirement options are and what types of penalties you may be up against for taking out retirement early.


taking out retirement early

Retirement funds come in all different shapes and sizes. Each plan has its benefits, so it’s essential to choose one that will work best for you and your family. And sometimes, despite our best planning, life happens, and you need to consider taking out retirement early. Your child is going off to college or getting married, and you’d like to draw on your retirement funds to assist. Maybe you’d like to buy an investment property or a second home and need money for a down payment. Perhaps you need to add an addition to your home to accommodate taking care of an aging parent. 

Whatever the reason, there may come a time when you need to dip into your retirement savings early. The great news is that taking out retirement early isn’t as taboo as it sounds. But there are considerations to keep in mind. Learn the pros and cons of taking out retirement early, and decide how to make your dollars work for you.

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7 Pros and cons to help you decide if it’s worth taking out retirement early

1. Con: penalty fees

Traditional IRA or employer-provided retirement accounts typically have a 10 % penalty fee if you withdraw funds before you reach 59½. 

2. Con: more tax on early distribution withdrawals

Because taking out retirement early is taxed as normal income, you’ll likely be paying more when you take an early distribution since that distribution will come in a year in which you have your normal, taxable employment income. Whereas if you take the distribution in retirement, you won’t have employment income pushing you into a higher tax bracket.

3. Pro and Con: hardship withdrawals

The IRS approves only six reasons for making a hardship withdrawal from your retirement fund: college tuition (for a payment due within that calendar year), a down payment on a primary residence, medical expenses not reimbursed by insurance, to stave off eviction or foreclosure, funeral expenses, and certain expenses to repair damage to one’s primary residence. 

This one is a pro and a con because while you can gain access to funds early, there’s quite a bit of red tape (and penalties). It’s worth noting that if you go this route, there’s a lot of paperwork involved and that you may owe income tax on your withdrawal. You may also have to pay a penalty for early withdrawal if you are under the age of 55 or if the IRS doesn’t grant you an exemption. 

Pro: for 401(k) and 403(b) 

If you are 55 or older when you separate from your employer (retire, terminated, lay-off, etc.), you can take distributions from your 401(k) and 403(b) without the 10% penalty. This may also be a perk for state and local government employees, depending on their 457(b) plan, but you will likely have to pay income tax on those distributions. 

Pro: for traditional and Roth IRAs only

If you have one of these two types of accounts, you can withdraw without penalty to pay medical premiums for you, your spouse, and dependents if you were unemployed and up to 60 days after re-employment. Another perk for traditional and Roth IRAs is you can withdraw penalty-free (up to $10,000 per spouse) if the funds are going toward the purchase of a home for you, your spouse, either sets of parents, grandparents, children, or grandchildren. This is penalty-free only if whoever is purchasing the home is a first-time homebuyer.

Pro: pay off medical bills without penalty

If your medical bills (or those of your spouse or dependents) in a given tax year are more than 7.5 % of your annual income, you can use retirement funds without paying a penalty.

Pro: check local and national legislation and recent events

At the time of this writing, national legislation has been passed to assist people dealing with the economic fallout from COVID-19. Some of these laws include waiving penalties for certain types of retirement accounts. Typically, when these types of acts are passed, a time limit can be extended depending on the situation. Look to your state and national legislation for guidance on whether you can waive any penalties for taking out retirement early.

Final considerations

Ultimately, it’s in you and your family’s best interest to consult with a financial advisor before taking out retirement early. There are details and caveats to each type of withdrawal scenario, and working with a financial advisor can help you identify ways to avoid penalties and additional tax when possible. 

Are you thinking about taking out retirement early? What is your biggest concern?   

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