personal finance

Half of Americans With Retirement Accounts Have Taken an Early Withdrawal

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A majority of Americans have dipped into their retirement accounts before their golden years, a survey from Bankrate found.

Fully 51% of those with the accounts said they have taken an early withdrawal, including 20% who did so during the Covid-19 pandemic, according to the poll. The survey was conducted Oct. 20-22 among a sample of 2,225 U.S. adults.

Generation Z tapped into their savings at the highest rate. While only 18% took an early withdrawal pre-pandemic, 40% said they did so during or after March 2020. Baby boomers were the most likely to keep their accounts untouched amid Covid — 34% had taken an early withdrawal before the pandemic but only 6% did so during or after March 2020.

"Withdrawing money early from a retirement account costs you now, and it really costs you later," said Greg McBride, Bankrate's chief financial analyst.

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Early withdrawals from traditional individual retirement accounts and qualified plans, like 401(k) accounts, are generally subject to income tax and a 10% additional tax penalty. Together, that can chew up to anywhere from 20% to nearly 50% of your withdrawal, depending on your tax bracket, he pointed out.

With Roth IRAs, you can withdraw any of your contributions tax- and penalty free.

There are exceptions, however. The IRS allows you to take money out of your IRA or qualified plan penalty-free for certain expenses (listed here), including unreimbursed medical bills. The CARES Act also allowed those affected by the pandemic to take up to $100,000 from their retirement plans and IRAs penalty-free in 2020.

However, there is still a price to pay.

"The real cost comes from the lost compounding over time," McBride said.

"Every dollar withdrawn today could be $10, $15, or $20 by the time you retire, so an early withdrawal robs your future nest egg of a significant sum."

The survey also found that 52% of Americans feel like they are behind on their retirement savings. More than 21% said they are on the right track, and 11% said they were ahead of the game. The findings were in line with Bankrate's 2019 poll.

Yet there is some good news. More than 24% said they are saving more now than they did before and almost 39% said they're saving about the same amount.

If you are behind and need to get back on track with saving for retirement, there are simple things you can do.

"Successful saving is all about the habit," McBride said.

Contribute to a workplace retirement plan such as a 401(k) via a payroll deduction. If you don't have that option and if you or your spouse earn income, you can contribute to an IRA. Set up automatic monthly contributions from your checking account and increase the amount you are saving with any pay raise, McBride advises.

If you are near retirement and your nest egg is lacking consider working longer or at least phasing in your retirement.

"This gives you additional time to save more for retirement, allows your assets to continue growing, and is less time those assets will need to support you once you do retire," McBride said.

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