Retirement Savings Should Not Be Withdrawn Early

When individuals and families have financial problems, they often look to bail themselves out by borrowing and/or withdrawing funds from their retirement savings accounts. It is estimated in 2013, approximately a third of individuals who lost their jobs removed their money from their retirement savings accounts. Early withdrawal of funds from a retirement account causes you to pay income taxes on these funds in the year that they are withdrawn and in addition you must pay a ten percent penalty for the early withdrawal of funds from a retirement account.

The hidden problem in withdrawing funds from a retirement account is that the long term savings aspects of the account were designed to ease the individual into retirement and maintain his or her standard of living. Without these funds, the individual may not be able to retire and/or may be impoverished in his or her old age.

Retirement Savings Are Not Personal Unemployment Insurance

A report by the Vanguard Securities Company in 2013, found that workers who left their jobs, in approximately a third of the cases, cashed out their 401(k) plans. The Vanguard report stated “given the ongoing uncertainties in the employment market, we anticipate an increase in cash outs in the near term, under the assumption that planned savings are sometimes used as a personal form of unemployment insurance.” It is strongly suggested individuals losing their jobs should not immediately cash out their retirement funds. There are numerous implications of these early withdrawal of retirement funds.

Beth McHugh, Vice President of Market Insight at Fidelity Investments, recently stated “keep it in the plan for now, until you can make a more thoughtful decision.” Retirement savings accounts are designed to make sure you are advancing your retirement. You should not be set back every time you changes jobs, by taking money from retirement funds.


Saving money is hard. Retirement savings plans whether they are 401(k)s, 403(b)s, pensions or thrift savings plans, should not be dipped into unless it is an emergency. You will need these funds later in life and may regret that they don’t exist when you retire.

helping adults plan for retirementElliot Schlissel is an elder law attorney. For more than 45 years he has been drafting wills and trusts and probating wills for his valued clients.