When people struggle financially, the temptation to take out early withdrawals can be strong. But, early withdrawals result in both a tax and a penalty. Nonetheless, in 2011, early withdrawals were at a record high, with the government collecting $5.7 billion in penalties.
Early taps of retirement funds have replaced home refinancing and second mortgages since the housing collapse in 2008. Loans taken out against a retirement fund aren’t always a viable option for those who most desperately need the money.
Critics of the penalties argue that the taxes and penalties on early withdrawals unfairly affect those most in need. Other economists and financial advisors say that these retirement accounts shouldn’t be accessible at all, and that the penalties correctly deter people from taking away from their retirement savings, which should be used only for retirement.
If people feel they have nowhere to turn, should the government loosen up restrictions on early withdrawal? Or, make the penalties for early withdrawal less onerous? Or, should people strictly adhere to not touching their 401K accounts, so a future financial cushion is better secured?
Meir Statman, is the Glenn Klimek Professor of Finance at Santa Clara University and the author of “What Investors Really Want”
John Lieberman, Managing Director at Perelson Weiner LLP, longtime member and spokesperson for the New York State Society of Certified Public Accountants