What happens when you withdraw money early from a retirement account?

When money gets tight, you might start thinking about raiding your retirement nest egg. Before you do, we urge you to consider how much it will truly cost you. By comparing different options, you’ll be able to figure out if withdrawing that money makes financial sense for you. With few exceptions, withdrawing money early from a retirement account (before you reach age 59½) will trigger a penalty of 10% of the amount you withdraw. That penalty increases to 25% if you withdraw funds from a SIMPLE IRA that you’ve held for less than two years. In addition to the early withdrawal penalty, any money you withdraw that was tax-deductible when you deposited it into the account, as well as earnings on that money (dividends, interest, and capital gains), will be taxed as ordinary income. This means the money you withdraw will be taxed at your marginal tax rate, so making a large withdrawal from your retirement savings could cause you to move into a higher tax bracket. Let’s crunch the numbers using the following scenario: Tarek, age 40, qualifies for head-of-household status, and his taxable income after taking the standard deduction and personal exemptions is $120,000, putting him in the