The 401k is designed for you to save funds for your retirement. The fund will make a significant share of its profits through compound interest. Compound interest works over a long period of time and you see most of its effects towards your later years once a large amount of money has been saved.
There are many reasons why you should not take early 401k withdrawal and most of them come at a cost for you. Before making your decision you should consider them carefully.
1-You will be charged a penalty for withdrawing money early on. The penalty is around 10% so if you withdraw $20,000 you will be charged a $2000 fee. That’s your money going down the drain and less money that will be earning for you. You may also be in the position where you have to pay taxes on the money you withdraw which means a large chunk of the money you withdraw ends up in the government’s hands instead of your own.
2-You will end up having less in retirement. Be honest, you have no idea what situation you are going to be in once you hit retirement age or how much money you will need for general living expenses, medical costs and miscellaneous outgoings. You don’t want to leave yourself in the situation of too little money. Withdrawing any funds from your 401k early will leave you vulnerable financial in the future.
3-You will lose on any interest accrual. The more money in your 401k the more interest earning potential you have. Instead of withdrawing money you should put in money regularly to provide a sufficient nest egg for the future. Most people won’t have enough because of early withdrawals or insufficient deposits. Your future is more important than that so if you can you should seek other sources of income or funding before you reach for the funds in your 401k.
Your 401k is a retirement account to help you financially when you leave the workforce. Even if you’ve only got a small amount saved in your 401k it’s no reason to make early withdrawals to soothe temporary financial woes. If you’re in a position to do so get a second job, sell some of your unwanted goods, or borrow money from family but think twice before withdrawing money from your 401k, and only do so under extreme circumstances where no other options are available.