Depending on the options your plan offers, you will want to carefully consider the pros and cons before withdrawing money from your retirement savings.
When you need cash to pay bills or make a major purchase, it can be tempting to turn to your retirement account. But taking an early withdrawal or loan could hurt your financial outlook long-term, especially in retirement. If your plan offers early access to your retirement savings, and you’re eligible to take advantage of it, carefully consider it first. Weigh these reasons to avoid it vs. the potential benefits – and explore other options that could help.
Three reasons to avoid taking early withdrawalsTaxes and penalties can significantly reduce the amount you end up with. Early withdrawals are subject to federal income taxes, and depending on where you live, state income taxes. Also, depending on the type of plan the funds are withdrawn from, you may have a 10% penalty tax as well (457 plans are not subject to the 10% early withdrawal penalty).
Consider this example:In the end, they’ll only net $17,000 of the $25,000 they took out. Plus, they’ll pay more in taxes than they might have in retirement, when they may have been in a lower tax bracket.
You’ll miss out on compound growth, making it harder to reach your goals.
Money that doesn’t stay invested loses the chance to grow through compounding (when your earnings make more earnings of their own). Ultimately, that means you’ll need to save more money out of pocket to hit your savings target.
Consider this example:A 35-year-old investor withdraws $10,000 from their account. If that money had been left in that account until age 65, and earned a 10% average annual return, it would’ve grown into almost $175,000. So, the true cost of the $10,000 withdrawal is much higher when you consider the growth they have now missed out on.
You may have less to live on in retirement.
Experts say you need to replace about 80% of your pre-retirement income to maintain your standard of living as a retiree. Social Security may replace less than 40%. If you withdraw money now and don’t have sufficient savings when you retire, you could face a shortfall between the amount you have and the amount you need. This could impact your quality of life throughout retirement.
The pros and cons of retirement account loans
Borrowing money from your retirement account can be a convenient way to meet a financial need — but the drawbacks can affect you in the long-run. Look into other borrowing options before you decide.
| Pros | Cons |
| There’s no loan application or credit report requirement. | There’s a borrowing limit, which varies by plan. Loans also typically have to be paid back within five years unless it’s for the purchase of a primary residence. Check your plan for details. |
| You're borrowing your own money. | Payments are made on an after-tax basis and may be taxed again upon withdrawal. |
| The loan can cover current debts at a potentially lower rate. | Less money in your account means there is less opportunity for growth. You can miss out on compound earnings that could be higher than the interest that you are paying. |
| You don’t pay income taxes or receive a penalty on the amount borrowed. | If you leave employment before repaying the balance, you may have to pay it off in full. If you don’t, any unpaid balances that remain may be subject to federal income taxes and a 10% early withdrawal penalty if you’re under 59 ½. It may also be subject to state tax, depending on where you live. |
| You are paying yourself interest. | Your long-term investment strategy could be disrupted. Since the amount you borrow is no longer being invested, the way your assets are allocated could deviate from what you intended. |
Other options to consider
There may be other ways to meet your short-term financial needs with less long-term impact. Here are several to consider:
Carefully consider the long-term impact before taking money from your retirement savings. There may be other solutions to your current financial needs.
headset iconTo learn more about what options your plan offers and to decide what makes sense for you, contact us today.
NRW-7645AO.1Nationwide Retirement Plans Nationwide N and Eagle logo with text labelling the logo specific to Retirement Plans
1-833-268-7080Not a deposit • Not FDIC or NCUSIF insured • Not guaranteed by the institution • Not insured by any federal government agency • May lose value
This material is not a recommendation to buy, sell, hold, or rollover any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.
Life and annuity products are issued by Nationwide Life Insurance Company or Nationwide Life and Annuity Company, Columbus, Ohio. The general distributor for variable products is Nationwide Investment Services Corporation, member FINRA. The Nationwide Retirement Institute is a division of NISC. Nationwide Funds distributed by Nationwide Fund Distributors, LLC, Member FINRA, Columbus, OH. Nationwide Life Insurance Company, Nationwide Life and Annuity Company, Nationwide Investment Services Corporation, and Nationwide Fund Distributors are separate but affiliated companies.
The Nationwide Group Retirement Series includes unregistered group fixed and variable annuities issued by Nationwide Life Insurance Company. It also includes trust programs and trust services offered by Nationwide Trust Company, FSB.
Nationwide, the Nationwide N and Eagle, The Nationwide Retirement Institute, Nationwide is on your side and Nationwide Funds Group are service marks of Nationwide Mutual Insurance Company. Let's Face it Together is a service mark of Nationwide Life Insurance Company.
© 2024 Nationwide Mutual Insurance Company and affiliated companies