Getting the Most out of Your 401(k): Leave It Alone Until You Retire

Here is tip #7 of our seven-part-series to help participants get the most of their 401(k) plans.

You may be tempted at certain points in your life to dip into your growing pool of retirement money. You might want to take a vacation, buy a new TV, or fix the roof on your home but we strongly advise that you leave that money where it is. The second largest contributing factor to poor financial preparation for retirement is “leakage” (with Failing to Start Saving as the first). Leakage typically refers to the premature removal of retirement savings from the system, generally in the form of un-repaid loans, hardship withdrawals by employees and cash-out distributions by job-changers.

Why You Shouldn’t Withdrawal Your Retirement Savings

Premature removal of savings can be quite costly, as it will be subject to your current income tax level on any amounts withdrawn. In addition, if under age 59-½, you will also be subject to a 10% early withdrawal penalty and could wind up paying nearly ½ of the amount withdrawn in taxes and penalties. What initially seems like a windfall for a job-changer often turns into a large tax bill and a squandered retirement savings account.

Bottom line, once the money has been saved for your retirement, don’t touch it.

Read through our blog to get all 7 tips to help you get the most out of your 401(k).