There are times when you will find yourself in need of money, and regardless of how hard you try to avoid cashing in your retirement funds, your only liquid asset might be your 401(k), IRA, or pension fund. Not only can this be a bad practice in terms of saving for your retirement, but it can be very costly in terms of tax and penalties if you cash in your funds prior to age 59.
If you withdraw money from your IRA before you are 59, you will pay a 10% penalty on top of being taxed on the money as if it were ordinary income.
If you withdraw money from your Roth IRA before you are 59, unless you qualify for medical or educational expense waivers, you will pay a 10% penalty plus you will pay tax on the earnings or profits from your investments in the Roth IRA.
The impact from withdrawing early from your 401(k) depends upon the provisions of your particular plan. If you withdraw prior to age 59 and you qualify for certain hardship waivers, you may not have to pay the 10% penalty, but you should check first with your plan administrator. You may be able to borrow against your 401(k), but again, the terms will depend on your particular plan.
Defined benefit pension plans normally do not allow withdrawals prior to age 55 or 65, but some may allow you to take a loan against your accumulated assets. Check first with your plan administrator.
Your broker or accountant will be able to help you decide what is the best way for you to access money in your retirement account. There are ways to avoid penalties through hardship waivers in some plans, and a financial adviser who knows your individual needs and circumstances may be able to save you a considerable amount of money.
While you are saving for retirement, there will be many times when the money in your account tempts you as an easy way to pay off credit card debt. It may seem better used as a down payment on a house. During your first few years of saving, you will be greatly tempted because you will have only a modest amount of money accumulated, but this is just the time to resist withdrawing that money. Once you have built a base, allowing it to continue to accumulate tax free produces much more impressive returns, and if you resist spending it, you may find you are glad you did.