This Controversial Reddit “Mistake” Could Jeopardize Your Retirement Nest Egg | Global News Avenue

As a result, you’re saddled with debt from credit cards, student loans, medical bills, and more. Each month, you’ll see interest accrue in the form of more debt, while your retirement savings plan takes a dent in your paycheck. Looking at your 401(k) or IRA balance, it may seem counterintuitive to preserve funds while trying to pay down debt.

you are not alone. Dozens of Reddit users ask this question every day question: “Should I withdraw funds from my retirement savings account to pay off debt?”

While eliminating debt by tapping your retirement funds will bring immediate financial relief, it may jeopardize your future financial security. Here’s why this move could be a big financial mistake:

Short term solution, long term impact

While paying down high-interest debt can save you money in the long run, you also have to consider the loss of retirement account potential. Saving you $1,000 in interest this year could cost you $100,000 in future investment growth when you retire.

Additionally, early withdrawals can trigger penalties and taxes, reducing the amount you have available to pay down your debt. for 401(k)s and Traditional IRAif you withdraw money before age 59.5, you will pay income tax on the withdrawal amount and pay a 10% early withdrawal penalty. In some situations, such as medical emergencies, you can avoid penalties, but you can never avoid income taxes.

Roth IRA Offering even more flexibility, you can withdraw your contributions tax-free and penalty-free at any time, as long as you’ve owned the account for at least five years. And if you withdraw funds from your 401(k) due to financial hardship, you may be prohibited from making contributions to your account for at least six months, further limiting your ability to rebuild your savings. This can be particularly harmful if you are unable to take advantage of an employer match during this period.

Penalty-Free 401(k) and IRA Withdrawals

Early withdrawal There is usually a 10% penalty, but this fee can be avoided in certain circumstances. According to the IRS, you need to demonstrate “immediate and substantial financial need.” These include:

• certain medical expenses
• certain natural disasters
• Costs associated with purchasing a primary residence
• Tuition and other education-related expenses
• Payments required to protect your primary residence from eviction or foreclosure
• funeral expenses

Even in these cases, income tax still applies.

bottom line

It’s generally a bad idea to use your retirement accounts to pay down debt. Withdrawing money early can stunt the growth of your investments, leaving you with a smaller safety net in retirement. While debt can be debilitating, you have options. You can try reducing or pausing contributions and using those funds to pay down debt rather than emptying your account.