5 Reasons You’ll Quickly Regret Raiding a Retirement Account

I know it’s hard. I know you’re desperate. You’re stressed and losing sleep. Things are tough. You have to do something, and soon. But whatever you do, don’t touch your retirement account. Don’t borrow against it. Don’t withdraw from it. Just leave it alone.

What’s so bad about liquidating a retirement account? Here are five reasons you’ll quickly regret doing that:


Happy piggy bank all locked up to keep retirement account safe

1. Momentum

Your retirement account, even during times when it appears to be losing value, is money you are going to need after you reach retirement age. And I can guarantee you are going to need it much more then than you do now. If you bleed it dry now, you stop the momentum—the pace at which it is growing. Think of your retirement account as completely out of your reach for now.

2. Penalties

This is huge. The penalty for early withdrawal (before you are 59 1/2) is severe. You will lose 10% right off the top. If you don’t think that is significant you are not thinking straight. Calculate how long you will have to work and contribute in the future to make up for this loss.

RELATED: 3 Reasons to Not Borrow from a Retirement Account

3. Taxes

If you think you’re losing sleep now, just wait until you owe back taxes on a retirement withdrawal. You have to pay income taxon the entire amount all at once—both federal and state if you live in a state that taxes income. Let’s say you cash cash a $50,000 retirement account before age 59 1/2. You will get a check for $45,000 (the 10% penalty is collected before distribution). Then you should expect to pay about $16,000 in taxes, leaving you $29,000 of the original $50,000 and nothing left for retirement.

4. Loss of exemption

A unanimous Supreme Court ruled in 2005 that Individual Retirement Accounts are shielded from the reach of creditors in bankruptcy proceedings; the same protection in bankruptcy that higher-paid workers receive for their 401(k) plans and company pensions. That decision boosts protections for the nest eggs of millions of people.

That means no matter what happens or how bad things get before you turn the corner and get back to work, creditors can’t touch it. And more importantly, if, God forbid, you have to file a bankruptcy case, it means that no matter what, the trustee can’t touch your retirement account, either.

5. Double taxation

The benefit of a traditional 40l(k) account is that you get to contribute and invest pre-tax dollars. You get to defer taxes until you take the money out in retirement. If you borrow now, you must repay the loan with after-tax dollars. Are you with me?

If you borrow say $10,000 from your retirement account, you will have to earn about $13,000 gross to end up with $10,000 after-tax dollars to repay the loan. You don’t get to repay with pre-tax dollars, so that’s the first taxation. Then, when you retire, you will pay tax on the same $10,000 dollars—taxation number two.

All money in traditional retirement accounts is taxed upon withdrawal regardless if the funds were borrowed then paid back with after-tax dollars. 

Too risky

It is just too risky and expensive to cash in or even borrow from a 401(k). If you are really strapped, you could halt contributions to your account temporarily, while leaving the balance alone to grow. That would beef up your paycheck with more money until the storm passes by.

MORE: The Cost of Dipping Into a Retirement Account

No matter how difficult things are right now, cross your retirement account off your list of options. Stop thinking of your 40l(k) account as your personal ATM machine. It is out of your reach for now. Then, get busy pursuing every other option that you have.

As difficult as things may be right now or may become in the future, I promise that in 10 years you’ll thank me.

Front cover The Smart Woman's Guide to Planning for Retirement by Mary Hunt


You should always seek counsel from an attorney, tax or other qualified professional for specific details relevant to your situation and before taking this advice or making any financial decision with regard to retirement accounts.

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6 replies
  1. Fish Sticks TaterTot
    Fish Sticks TaterTot says:

    I wish everyone would see this. I retired from one of the world’s largest companies and you would shudder to realize how many of those well-paid college-educated people would borrow from their 401k. They would call it a “win-win” because they would pay it back with interest. We have a truly uneducated population out there because I could not get them to grasp the concept of compounding had they left their money in the plan to begin with.

    I love all your articles! Thanks!

  2. Sue in MN
    Sue in MN says:

    In many cases, there may be another option. You cannot use your retirement account as collateral to secure a loan, but credit unions will often consider your contributing to one regularly as evidence of fiscal responsibility, and give you a signature loan for a short period. Then you can suspend contributions during the crisis like Mary suggested and use the cash to pay the loan. My daughter was able to do this in a pinch when back in school and struggling to cover everything.If you can get such a loan, you can also go on a crisis budget, stopping all optional expenditures like cable, eating out, coffees, and gym memberships, and pay it back.

  3. April Stout
    April Stout says:

    I have borrowed, not withdrawn, from my 401K. The interest I pay on this loan goes back into my account. So I am paying myself back with interest. There is no tax penalty. And while those funds I borrowed are not accruing as an investment they are making 5% interest. My personal rate of return when I borrow on the account was only 2 %. So I see it as a win win. Maybe not all companies do it this way but mine does. I can only have 2 loans at a time and only half the balance of my account or up to $50,000 max.

  4. Luisa
    Luisa says:

    Great advice, Mary. I took about $20,000 out of an IRA over 20 years ago to pay off debt incurred by my ex-husband when I was desperate. I’m retiring this hyear and things will be okay, but I’ve estimated what the difference would have been and it’s heartbreaking. I hope anyone considering this move will heed your advice.

  5. Kay Fellenstein
    Kay Fellenstein says:

    I have a question you may know something about, or not. My Brother in Law recently passed away and had a will naming my husband as Executor and leaving all his assets to each of three siblings. The problem is that he owed on his home and just bought out a lease on his vehicle. Basically he owed more than he had in assets.
    He had one life insurance policy which he borrowed on which my husband was the beneficiary. We did receive some of what was left on it.
    He also had two investment accounts which he did not leave a beneficiary at all. He was never married.
    We contacted a lawyer and he recommended we do nothing and everything will go away in 6 months. So far it’s been over 2 months and nothing has happened yet.
    I am not sure if you ever heard of a situation like this or not, and if the lawyer gave us the right advice.
    Since he doesn’t have anything we don’t want to spend our savings on paying the bills he left behind.

    • Fish Sticks TaterTot
      Fish Sticks TaterTot says:

      I am not a lawyer, but the estate is responsible for paying the bills. It is not your responsibility to use your personal funds to pay off the deceased’s debts. I know this because my friend’s mother died owing huge dollars. It was NOT her son’s debt and he was not responsible for her debts even tho he was executor. Whatever was in the estate that could be sold to pay off the debts is what was used. If the estate has no money to pay its debts, the lawyer should be assisting in notifying creditors of the fact. If his investment accounts have money, they should be used to pay down the debts or pay them off if there is enough.

      I would get a different lawyer. Things don’t magically go away in 6 months.


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