12. Tapping Your Retirement Account for Cash
If you’ve gotten into the habit of tapping your retirement account for cash — to pay off debt, buy a car or make a down payment on a home — you could be putting a serious dent in your savings and taking on a big tax bill.
“First, your retirement savings is now smaller, and you forfeit all the compounding,” Olson said. Then, you’ll have to pay taxes on any withdrawals from a 401k or traditional IRA, and a 10 percent early withdrawal penalty if you’re younger than 59 ½. You can, however, withdraw contributions to a Roth IRA tax- and penalty-free.
If, for example, you prematurely withdraw $25,000 and are in the 25 percent tax bracket, you’d owe $6,250 in federal income taxes and another $2,500 in early withdrawal penalties, leaving you with a net of only $16,250, Olson said. If you had left that $25,000 to grow for another 25 years with a 6 percent annual return, you would have more than $107,000.
(Tetra Images via Getty Images)