Why Suze Orman Says Tapping Retirement Savings Early to Cover Emergencies Is a Bad Move

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This is a decision that could cost you dearly.

Key points

  • If you need cash on the fly, you might be inclined to dip into your IRA or 401(k).
  • This could lead to a world of undesirable consequences.
  • You don’t want to face a tax penalty or find yourself without enough money to live on in retirement.

Putting money aside in an IRA or 401(k) for retirement is definitely a good idea. Once you stop working and earning a salary, you should expect to need more than Social Security to make ends meet. And unless you have a pension or some other obvious source of retirement income (which many workers don’t today), you’ll need savings to supplement those benefits.

Meanwhile, if you have money in an IRA or 401(k), you can assume you don’t have to worry as much about building up an emergency fund. After all, if you have thousands of dollars in a retirement plan, you can always make a withdrawal if you need the cash right away, right?

Bad. While you could get away with plundering your IRA or 401(k) early, it could lead to a world of adverse consequences, insists financial expert Suze Orman. So you’re better off leaving your retirement funds alone and building up a balance in a savings account instead.

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Early pension withdrawals are bad news

The problem with operating an IRA or 401(k) before retirement is twofold. First, if you withdraw from one of these plans before age 59.5, you will face a 10% penalty for withdrawing those funds early. So if you withdraw $10,000 at age 40 to cover certain medical expenses, you’ll lose $1,000 upfront. Plus, if you have a traditional IRA or 401(k), you’ll also pay taxes on your withdrawal (although to be fair, you’d also pay them during your retirement).

Why such a harsh penalty? The IRS offers tax breaks to workers who contribute to an IRA or 401(k). Specifically, the money you put into a traditional IRA or 401(k) is tax-exempt, so if you contribute $3,000 a year, that’s $3,000 of income the IRS won’t tell you about. will not impose.

But the IRS wants IRA and 401(k) participants to set aside that money for retirement. And so he doesn’t like early withdrawals – clearly.

Costly penalties aren’t the only reason to avoid an early IRA or 401(k) withdrawal. The other problem is that the more money you take out of one of these accounts earlier in life, the less you will have later in life. And that means you risk a shortfall at a time when working even part-time may not be an option due to health or mobility issues.

Leave your retirement savings alone

If you’ve managed to amass a nice retirement nest egg, you should congratulate yourself. But that doesn’t mean you’re off the hook when it comes to building an emergency fund.

You need money in a regular savings account to cover expenses like sudden home repairs, car problems, and medical bills — or to cover your expenses in the event of an unexpected layoff. And the sooner you build that short-term safety net, the more confidence you can have in your overall finances.

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