Want the short answer? NO!!!
Why? Most of the contributions to an employee-sponsored retirement plan are done so on a pre-tax basis. The contributions have never been taxed.
Here are my reasons why you should not pull money out of your retirement plan early:
- Lose the opportunity for your money to grow tax-deferred
- Time-value of money is crushed when you pull out the money you have saved for retirement. You will never get that time back!
- If you pull money out of your retirement plan early, it will be subject to taxes PLUS a 10% penalty.
- You will have to recognize the withdrawal as income for that year which will usually bump you up a couple of tax brackets.
- It is a VERY EXPENSIVE way to obtain money. You will ultimately pay around 45% taxes on the money you withdraw! If you pull out $50,000, you will actually bring home $27,500! Taxes and penalties will cost you $22,500! That is worse than a credit card!
- I would ask the question, “Why do you need the money?” There is some reason that is causing you to want to pull the money out. In MOST cases that I see, the reason is that the person(s) are spending more than they make and are turning to debt to make up the difference. They view this cash withdrawal as a way to avoid more debt. I have seen too many cases where the money is withdrawn (very expensively), and they never change their spending behavior. They then end up with zero or very little in their 401(k) PLUS they still have a pile of debt that increases every month!
- FINAL REASON: It’s for RETIREMENT!!! That is why it is called an employee-sponsored RETIREMENT plan!!! Trust me. You WILL be tired some day. You WILL want to reTIRE someday. If you take this money away, how will you be able to retire?