Short-Term Needs Vs. Long-Term Retirement Savings

IRAs and employer-provided retirement plans are designed to promote long term retirement savings. The benefits include attractive tax-deferral savings and accumulation of earnings.  The costs do not begin until you pay taxes on the distributions, or face penalties on early withdrawals. However, at some point, you may be tempted to use a retirement plan for immediate financial needs. Before you decide what to do, you need to consider the potentially high costs of your choice.

The Cost of Withdrawals

Withdrawal rules are different for IRAs and qualified plans, such as 401(k) plans. Generally, you can withdraw funds from an IRA for any reason, as long as you are prepared to pay the taxes and penalties. Some withdrawals are penalty-free, including those used for health insurance (if you are unemployed), the purchase of a first home and the extraordinary expenses needed to pay for college tuition, disability-related costs and deductible medical expenses.