Plan withdrawals can knock retirement off track

The IRS collected approximately $5.7 billion in penalties from early withdrawals from qualified retirement plans in 2017, the latest year for which information is available.[1] Distributions before age 59½ expose individuals to a 10% penalty tax, meaning Americans took out roughly $57 billion in early distributions subject to penalties that year.

Taking money out prematurely can result in the permanent removal of assets from retirement accounts, keeping people from accumulating the assets needed for a comfortable retirement.

Plan sponsors would be wise to explore strategies to balance access to funds with the need to build long-term retirement savings.

Note: 10% penalty tax waived temporarily for certain circumstances related to COVID-19 as provided by the CARES Act.

What you should know

  • Employee education can help plan participants understand the benefits of long-term investing, recognize the implications of early withdrawals, and improve retirement outcomes.
  • Workplace-based financial wellness tools can improve participants’ general financial literacy. Offering resources on topics such as budgeting, debt management, financial planning, and the importance of saving for emergencies can help avoid early withdrawals.
  • Lower minimum loan amounts may help encourage participants to avoid borrowing more than they need to cover planned expenses.
  • Plan loan repayment options can help former participants continue making loan repayments after job separation.
  • Simplified rollover processes may encourage transfer of retirement balances to other qualified plans.
  • Offering partial distributions provides separating participants with choices for preserving account balances while allowing access to address immediate financial needs.
Number of tax filers who paid penalties for early withdrawal from plans in 2017.[1]
Increase in early withdrawal penalties paid in 2017 over prior year.[1]