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Millions of Workers Dipped Into Retirement Savings This Past Year. That’s a Big Problem – The Motley Fool

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Raiding your retirement plan could spell trouble down the line…….

Image source: Getty Images

Raiding your retirement plan could spell trouble down the line.

Key points

  • New data reveals that 18% of workers took money out of a retirement plan over the past year.
  • Raiding an IRA or 401(k) could come with a host of unfavorable consequences, like not having enough money in retirement and having to pay a penalty.

Workers are often told to save for retirement so they have access to enough money to pay their bills later in life. And it’s a good idea to contribute steadily to an IRA or 401(k) plan, if your employer offers one.

But once money lands in your retirement account, it’s really important you keep it there. That way, you can make sure it’s accessible during your senior years, when you’re apt to need it the most.

Unfortunately, over the past year, a good 18% of workers have dipped into their retirement savings, according to Salary Finance’s fourth annual report. And that’s a move worth avoiding for many reasons.

The dangers of taking money out of retirement savings

Any funds you remove from an IRA or 401(k) during your working years won’t be available to you in retirement. And that alone is a problem.

But also, when you take money out of one of these plans, you don’t just remove a chunk of your long-term savings. You also take away the option to invest that money and grow it into a larger sum.

Let’s imagine your IRA normally delivers an 8% average annual return on your investments. (That’s a little below the stock market’s average.) If you take a $5,000 withdrawal 20 years before retirement, you won’t just be out $5,000 later in life. Rather, you’ll be out over $23,000 when you factor in missed investment growth.

Plus, most of the time, when you take money out of an IRA or 401(k) prior to age 59 1/2, you’re assessed a 10% early withdrawal penalty on the sum you remove. So, let’s say you need $5,000 in a pinch to cover a home repair. Remove that money at age 45, and you’re looking at losing $500 of it right off the bat.

A better way to access cash

If you need money in a pinch and have equity in your home, borrowing against it could be a better option than raiding a retirement plan. You can take out a home equity loan and pay it off …….


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