“In recent years we have seen a sharp uptick in active employees wanting to withdraw from their retirement accounts,” said Rosalice C. Hall, MBA, CRPS, a senior relationship specialist at Greenleaf Trust.
She said the reasons for withdrawals vary widely, ranging from falling behind on bills and catching on up credit card debt to paying for car repairs.
“It’s clear that high inflation and a general unease about the economy are weighing heavily on all retirement plan participants,” she said. “While the IRS does allow for withdrawals to satisfy ‘an immediate and heavy financial need,’ it’s important to consider the future costs of such actions as [your] mortgage [and] your future to fund current expenses.”
She said recent economic conditions have caused employees to be more willing to turn to hardship withdrawals, but economics aren’t solely to blame for this problem.
“Key barriers were removed with legislation in 2019, making it generally easier to access retirement funds,” she said. “The easing removed the requirement to exhaust loans before withdrawals, made earnings available to be included in withdrawal amounts and eased hardship verification requirements.”
Whether you were laid off or fired, you suddenly found yourself unemployed. Finding a new job might take a while, so you’ll need a way to pay the bills in the meantime.
“[If] you have exhausted other sources of income and emergency funds, using retirement savings might be necessary to cover essential living expenses,” said Doug Carey, CFA, owner and founder of WealthTrace, financial and retirement planning software for consumers. “However, before doing this you should explore unemployment benefits and alternative income sources before depleting your retirement funds.”
Hopefully you’ll never find yourself in a hurricane, wildfire or other natural disaster. However, it could happen — and picking up the pieces might be pricey.
“In the aftermath of a natural disaster or catastrophic event, using retirement savings to rebuild your life could be necessary,” Carey said.
Overwhelming Debt
“If you are drowning in high-interest debt and other debt consolidation methods are unfeasible, using retirement savings to pay off high-interest debt can make sense,” Carey said. “This can potentially improve your long-term financial health by reducing interest payments.”
After paying your debt off, you can use the money you were putting toward bills to repay your retirement fund.
Eviction or Foreclosure
If you’re facing eviction or foreclosure, it might make sense to tap into your retirement fund, said Jarrod Sandra, MS, CFP, owner and financial planner at Chisholm Wealth Management. However, he said this is only if you can then sustain the payment moving forward.
“If you borrowed too much on a home or took out too large of a rent payment, then pulling this lever only kicks the can down the road for the inevitable eviction,” he said. “I want people to understand they are robbing their future selves, so it should be an important reason and one that is not recurring.”
He said he’d rather see you build an emergency fund of three-to-six months’ worth of living expenses.
“Then they aren’t turning to the retirement accounts that quickly and have time to think through the process,” he said.
Medical Expenses
Healthcare isn’t cheap. Therefore, if you’re facing a life-altering medical emergency, covering at least part of the bills with money from your retirement fund could make sense, said Khwan Hathai, CFP, CFT, founder and financial therapist at Epiphany Financial Therapy.
“In this scenario, your immediate health takes precedence over future financial security,” she said. “The emotional weight of such a situation requires a delicate balance of logical financial planning and a nuanced understanding of your own feelings towards money and well-being.”
Higher Education
It might not seem like a pressing financial emergency, but higher education is expensive. Therefore, Hathai said investing in learning for yourself or a loved one could make sense with retirement funds, as it has the potential to significantly boost future earning capabilities.
“However, this isn’t just a straightforward financial transaction,” she said. “The psychological benefits of education and the potential for higher lifetime satisfaction could make this a sensible trade-off.”
If you do choose to withdraw funds from your retirement savings for any reason, she said you need to read the fine print.
“It’s important to be aware of the associated tax liabilities and potential penalties, as these could negate some of the benefits,” she said. “Moreover, you’ll need to consider the future growth potential you’re sacrificing by withdrawing these funds prematurely.”
Ultimately, she said a decision like this is seldom purely financial.
“They are fraught with emotional and psychological implications that can cloud our judgment, if we’re not careful,” she said. “Adopting a transformative money mindset, while grounding your choices in a dynamic behavioral financial planning approach, can help you navigate these tricky waters more effectively.”
She recommended consulting with a financial advisor before taking any major steps. This can allow you to receive advice tailored to your unique situation.
