Early withdrawals from Individual Retirement Accounts and 401(k) plans trigger taxes and penalties that can really add up.
There are exceptions, but only for some people who use the money to buy a first home, or pay for higher education or other items. Many people have at least a vague understanding of all this but that isn't stopping them.
The number of companies reporting early withdrawals for hardship from 401(k) and 403(b) plans (the nonprofit version of 401(k)s) rose to 44% last month from 15% in October 2008, according to a recent Watson Wyatt study that polled executives at 141 U.S. based companies using an online questionnaire.
Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research, says making an early withdrawal should be a last resort, "somewhere right before homelessness and/or starvation."
Early withdrawal deletes all potential for future tax-deferred compounding, to say nothing of the taxes and penalties that can wipe out more than half of the amount withdrawn. "Better to borrow or beg (but not steal) before raiding your retirement," says Mr. Spiegelman.
Source: The Wall Street Journal, May 7, 2009