Retirement Accounts: 4 Tips To Avoid Withdrawal Mistakes

People look to retirement accounts for survival in their old age. Tapping into retirement savings or options too early can lead to significant problems in the future, but it can also cost you hundreds of thousands of dollars in potential gains. 

While prepping for retirement can prevent future years of stress, sometimes life happens, and you need to tap into accounts early for current financial relief. If you must tap into retirement accounts, make sure you do so in the proper order. Unfortunately, the optimal sequence for withdrawals is different for everyone, meaning you should consult a financial advisor before doing anything. In the meantime, try to avoid the top four mistakes when withdrawing from retirement accounts.

1. Look To Your Investments First

Too many people dip right into their 401(k) or IRA when they need cash, but that is a mistake. The longer you can leave your retirement investments alone, the more time you'll have for compound interest. Taking from these accounts can quickly eat up a year's worth of retirement savings. 

Look to your other investments: ETFs, mutual funds, stocks, brokerage accounts, and bonds. While you might have to pay capital gains tax or distributions tax, it is likely less costly than taking from your retirement in the long run. However, as with any financial decision, talk to an expert first.

2. Stay Away From Early Social Security Benefits

Many people are eligible for early Social Security benefits at 62. What most retirees don't realize is early benefits are not the same as full retirement benefits. While it is tempting to apply for Social Security at 62, 66, or 67, you do not qualify for maximum benefits until you turn 70. 

Waiting until you are 70 allows you to take full advantage of the years you paid into the system. However, some situations might merit early collection. A financial advisor can help you understand your financial situation and whether early benefits fit your retirement plan.

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3. Avoid Withdrawing From 401(k) and IRA Until Required Minimum Distributions

Many investors begin dipping into their 401(k) at 59 ½. While technically allowable, starting to make withdraws so early only hurts your interests. According to the law, investors are not required to take out funds or required minimum distributions until 72. Therefore, if you start removing funds at 59 ½, you effectively lose out on 12 ½ years of compounded interest — not the best investment strategy.

4. Don't Touch Your Roth IRA Early

Unlike traditional retirement accounts — 401(k)s and IRAs — a Roth IRA does not require minimum distributions at any age. Additionally, as you paid taxes on your contributions before investing, your money continues to grow tax-free. You can leave your investment in the account for as long as you like, so it pays to leave alone for as long as possible, even tapping into other accounts if necessary. 

No one understands your financial situation better than you, which means it is easy to say, "do this" and "don't do that." However, only you can decide what is suitable for your financial situation. Still, before you delve into your retirement savings and investments, talk to a financial advisor because if there is any way to leave your retirement alone, it is likely for the best. 

When would you consider tapping into your retirement accounts, if ever? Leave a comment.

Anna Mae Zarcone - November 10, 2021

I saved all my life in order to leave some finances to my children who have children who hopefully will be going to college.

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