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Retirement Plan Withdrawals

Investing

So you are looking at your 401(k) plan and all that money you have saved. Good job. But now after all that saving scrimping you want to splurge, what would it hurt if I took $25,000 out of my account now, after all retirement is 10, 15, 20 years away, I'll make it up, WRONG.

I get asked at least once a year a variation of this question – same facts just different numbers. They always want to know the tax cost of the withdrawal. That's only one problem. Stay with me here as we look at the total cost of this splurge.

TAX COST

Let's assume:

  • You are in the 12% Federal tax bracket (you could be in the 22% or even higher bracket)
  • You have a state tax rate of 9%

So, you take out $25,000 but you only net $17,250! You need to pay the following taxes

  • Federal tax at 12% = $3,000 (this could be higher)
  • State tax at 9% = $2,250
  • 10% Penalty for being under 59 ½ = $2,500

There goes $7,750!

THE REAL PROBLEM

But the real problem, what does this withdrawal do to your retirement account. This to me is the bigger issue.

Let's assume:

  • Before the withdrawal you have $100,000
  • You earn 6%

You balance in the future would be:

YearWithdrawalNo WithdrawalComment
175,000100,000
5$100,367$133,823
10$134,314$179,085
12$150,914

$201,220

Note the withdrawal has cost $50,000.  Twice the amount withdrawn.

And it just keeps getting worse!

This graph shows the cost over 30 years:

So, unless you have exhausted all other options and cannot live with out that $25,000, leave it where it is.