Is it OK to tap retirement money early?

Posted Jun 20th 2007 3:45PM by Zac Bissonnette
Filed under: Newspapers, Columns

A piece in Saturday's New York Times look at the question: When is it OK to tap into retirement money early? The article sums it up eloquently: "Most Americans have enough difficulty building up a nest egg, and cracking it prematurely could mean living on cat food (slang for Social Security) later."

One of main problems with taking out retirement money early is that the IRS typically charges a 10% penalty, depending on the type of account. In a ROTH IRA for example, you can take out your principal any time you like because the money has already been taxed as income. But with a traditional IRA or 401(k), you'll be hit with a hefty penalty.

But even financial planners disagree on when it's OK. If you want to withdraw from your IRA to pursue a dream, such as changing careers or starting a business, isn't that what money is for?

A general rule is that withdrawing from a 401(k) should be a last resort for pursuing your dream. In other words, if you want to pursue a dream, you should be willing to sacrifice your lifestyle too, at least temporarily. For example, here's the story of one couple in the story:

Mr. Wesling and his wife, Colleen, are in this situation. She quit her job as an information technology consultant in March and is willing to take a significant pay cut from her former salary of about $150,000 to start an anticipated career as a bookstore manager.

In May, the Weslings began taking $7,000 chunks out of her approximately $450,000 I.R.A. to maintain their lifestyle - which includes tickets to the symphony, $300 dinners on weekends and an annual art-buying vacation to Maine - while she searches for a job.

Does anyone thinks that makes sense?

Tags: 401(k), IRA, retirement

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Reader Comments (Page 1 of 1)

6-20-2007 @ 5:41PM

fbarrett said...

You wrote, "Does anyone thinks that makes sense?"

Do you think that sentence makes sense? Does anyone edit this stuff?

6-20-2007 @ 6:18PM

Jeff said...

I thinks it makes sense. What doesn't make senses is that the article doesn't adequately address questions such as first-time home buyers, or reattaching severed hands... does that make it OK to tap retirement money?

6-20-2007 @ 11:03PM

beanspants said...

let's see: at best $450k * 1.10 ~ $500k, or $50k per year. assuming no taxes, then she can take out $50k, which would be $4k per month. The bad part is that she seems to want to have a stressfree job but is not willing to adjust her lifestyle downwards to match her salary.

apparently isn't just welfare queens who want the good life until they die without paying for it.

great. somebody else for me to support in the future.