Why You Should Avoid Early Retirement Plan Withdrawals

Tapping into your retirement plan early is not a good idea. There are several reasons that people commonly tap into a retirement plan that are not in their best interests. Here are a few of the most common reasons that make people tap into your retirement plan when the shouldn't.

1. Buy Consumer Goods

One of the worst things that you can do is tap your retirement plan in order to purchase consumer goods. For example, some people might tap into a retirement fund and use it to buy home furnishings, such as a new entertainment system or new furniture. This is quite possibly one of the worst financial mistakes that you could make.

When you tap into your retirement plan early for something like this, you are going to have to pay a 10 percent early distribution penalty as well as pay income taxes on the money that you took out. You should always buy things like this with money from your regular savings or paycheck.

2. Pay Low Interest Debt

Some people like to tap into their retirement plans in order to pay off low interest debt. This is usually a bad move as well. If you are tapping into your retirement savings in order to pay off a hard money loan or credit card debt with high interest, then it might be a good idea. However, if you are tapping into your retirement money to pay off a low interest student loan, this does not make much sense. You need to think about how much you are potentially giving up in returns and penalties in order to pay off a low interest debt. Even though it can provide some psychological relief to get rid of debt, it is not the best financial decision that you can make.

3. Questionable Investments

Many times, people will take money out of their retirement account in order to fund an investment opportunity. In many cases, this is not going to work out to your advantage. Unless you are sure beyond the shadow of a doubt that you are going to make a substantial amount of money from the investment opportunity, you should most likely leave the money in your retirement account. If you think about it logically, your investment opportunities going to have to make up the 10 percent early distribution penalty as well as the amount of income taxes that you have to pay before you can even make any profit. That is a lot of ground to make up for any investment, especially one that you are not sure of.

4. Buy a Second Home

Using your investment funds to purchase a primary residence can be a good idea in some cases. This would qualify for a hardship withdrawal and you would not have to pay the early distribution penalty. However, if you are considering tapping into your retirement funds to purchase a second house, you should avoid this scenario. Your retirement plan should only be used for financial emergencies.