What happens if I take out my retirement savings early?

1 min readLast updated October 4, 2023by Rachel Carey

Your retirement savings are for retirement. Borrowing against your retirement fund or cashing out savings is never advised. In an ideal world, you should not touch your retirement funds until you are at least 59½.

But, as much as you can plan, unexpected events occur. To cover the costs associated with these events, you need to get money from somewhere, and for many, this means dipping into their retirement savings.

While it may seem like the perfect solution, heavy penalties and costly tax consequences are associated with early withdrawals.

Tax penalties and tax consequences

The IRS usually imposes a 10 percent penalty on early withdrawals from 401(k) and 403(b) plans and IRAs. This is in addition to the income tax you are already paying on the money.

The IRS states, "A plan distribution before you turn 65 (or the plan's normal retirement age, if earlier) may result in an additional income tax of 10% of the withdrawal amount. IRA withdrawals are considered early before you reach age 59½ unless you qualify for another exception to the tax."

These withdrawal penalties also apply to Roth IRAs. To avoid these penalties, money must have been deposited in the IRA and held for at least five years, and you must be 59½ years old.

However, there are some circumstances where these penalties are waived. These include:

  • Major healthcare costs – you can take IRA distributions without penalty if you use the funds to pay for unreimbursed medical expenses that exceed 10% of your adjusted gross income.

  • Unemployment – if you lose your job and receive unemployment payments for a minimum of 12 consecutive weeks, you can take money from your retirement savings to pay for health insurance premiums.

  • Buying your first home – you can withdraw up to $10,000 from your IRA to help purchase or build your first home.

How early can you access Social Security?

For Social Security benefits, it works a little differently.

If you start taking your benefits at 62, they will be lower than waiting until full retirement age. This is because a small percentage for each month reduces your benefits before your full retirement age.

Retiring before 62 means you'll receive no income from Social Security. If you stop working after 62 but before your full retirement age, which is between 66 and 67, depending on the year you were born, you'll receive 70–75 percent of your federal retirement benefit.

The rule of 55

The rule of 55 is a legal but little-known loophole that allows you to withdraw from your pension funds from age 55 without incurring the 10 percent tax penalty that usually accompanies early withdrawals.

How does it work?

If you turn 55 during the calendar year you lose or leave your job, you can begin taking distributions from your most recent employer's 401(k) or 403(b) without paying the penalty. However, you must still pay taxes on your withdrawals.

You must withdraw from a workplace pension and not an IRA, as the rule of 55 does not apply to personal retirement accounts.

The rule of 55 is that it doesn't prevent you from returning to work at a later date. You may choose to retire at 55 due to ill health or to enjoy a career break. But you can return to work once you recover or if you'd like to start working again. If you do choose to retire at 55, it's important to note that you will need to wait until you are at least 62 to start receiving your Social Security benefits, and you will not be able to access Medicare until you hit 65.

How does early access impact your retirement?

Accessing your savings can have a huge impact on your retirement.

Not only is a chunk of your hard-earned retirement savings gone, but it can also be difficult to recover from. You've spent most of your working life building your retirement nest egg, so with a portion of your savings gone, you might never get your investment back up to the amount they once were.

This sets you back in the long run and could massively impact how and when you want to retire.

The bottom line

Choosing when you retire is a huge personal decision that everyone approaches differently. Some may decide to retire early, others may clock out right on time, while others may choose to remain in the workforce for a little bit longer.

Whatever you decide, you'll need a retirement plan that works for you. However, it is always important to ensure you can sustain yourself financially – particularly if you have eyes on an early retirement.

Having an expert financial advisor to offer advice can help you decide when to retire and how to ensure your savings match your retirement goals.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.