The cost of taking money out of a retirement account can really add up over time, resulting in thousands of lost dollars.
Many accounts people choose to use are 401ks or individual retirement accounts, also known as IRAs.
IRAs offer more ways to invest retirement funds and 401ks usually offer an employee match. Both work towards supplying the individual enough money to retire comfortably.
By withdrawing money from these accounts before reaching the age of 59.5, you risk an additional 10% penalty on top of income taxes.
This is defined as leakage, and many people withdraw their funds when they switch to a new employer. On average, Republican Senator Tim Scott says employees will have between 7 and 11 employers in their lifetime.
In 2015 alone, $92 billion dollars were lost due to leakage.
How does losing money and switching retirement accounts work?
Most 35-44 year old people have an average of $51,000 deposited into a retirement account. The rule of thumb for people to withdraw from their accounts if they absolutely need to once is to take out 4%.
State taxes vary, but by using this calculator, you can type in your age, state and federal tax rate, and the amount you want to withdraw to see how much taxes and penalties can be. Every time you withdraw, that would be how much you lose for that amount- and that adds up.
To avoid penalties when switching employers, you can roll your 401k into your IRA account with no penalty if you do it within 60 days. If not, you need to withdraw the money, pay the penalties, and deposit it into your new account.
The one exception to the rule is that if you’re under the age of 59.5 and think you’ll be in a lower tax bracket when you retire after being a high income earner.
Some with a 32% tax rate that drops to a 12% rate could withdraw early and take the 10% penalty, effectively have a rate of just 22% instead of that 32%.
Related: How much can I take out of or deposit into my 401k?
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