The more money you remove from your 401(k) or IRA ahead of retirement, the less you’ll have available once your time in the workforce comes to an end — it’s that simple. And so taking an early withdrawal from your long-term savings is something best avoided.
Remember, you might think that removing $10,000 from your retirement account is no big deal. But if you take that withdrawal when you’re 40 and you’re not retiring until age 70, and your investments in your account generate an average annual 7% return, you’ll actually end up having lost out on about $76,000 after all is said and done. That’s a much more significant loss.
Now during the coronavirus pandemic, a lot of people were forced to tap their savings early to make ends meet. That was, to be clear, an extreme situation, and such withdrawals were more than justifiable.
But there’s a difference between taking an early 401(k) or IRA withdrawal due to an emergency and taking one for non-urgent matters. And you shouldn’t raid your retirement account to pay for home renovations or do anything that isn’t absolutely pressing.
The same applies to borrowing from your retirement savings. Though there’s no such thing as an IRA loan, 401(k) loans do exist. However, there are risks involved with 401(k) loans. If you don’t repay your loan on time, it will be treated as an early withdrawal from your account if you’re not yet 59 1/2. That could leave you on the hook for a costly 10% penalty on the sum you remove. And then if you don’t repay that loan at all, you’ll be short the money later in life.