There are times when withdrawing from retirement savings might seem like a good idea or the best option, despite the consequences. People may consider withdrawing these funds for several reasons.

For example, facing a severe financial emergency like medical bills or sudden unemployment. These emergencies usually require immediate funds that might not be available from other sources.

Also, if you want to avoid bankruptcy or foreclosure by all means, the thought of dipping your hands in your retirement savings can cross your mind. Bankruptcy is what most people avoid, so rather than live with that, you may want to consider other desperate measures like using your retirement savings to save yourself.

There are so many reasons why anyone may want to withdraw from their retirement savings.

While these reasons are compelling, it’s still important to weigh the benefits against the future costs to retirement stability.

Tax Implications 

When considering withdrawing from retirement savings, it’s important you understand the tax implications. Retirement savings plans like RRSPs (Registered Retirement Savings Plans) are designed to be long-term savings vehicles, with tax benefits at the time of contribution but deferred taxation upon withdrawal.

Any amount you withdraw from an RRSP is treated as taxable income in the year it is withdrawn. This implies that the withdrawn amount is added to your annual income, which pushes you into a higher tax bracket, this will then increase your tax liability. It’s possible that this could result in a situation whereby a larger portion of your withdrawal could go to taxes.

Aside from the regular income tax, early withdrawals made before retirement age can incur additional penalties. For example, the Home Buyers’ Plan and the Lifelong Learning Plan allow for tax-free withdrawals under specific conditions, but these funds must be repaid within a set timeframe to avoid tax penalties.

The tax rates and implications of withdrawing from retirement savings can vary based on the total amount of your taxable income and your financial situation. Thus, it is advisable to consult with a tax professional or financial advisor to understand how a withdrawal will affect your taxes and to explore possible strategies to minimise your tax burden.

Compound Growth 

Compound growth is the process by which a sum of money grows exponentially over time as interest or earnings are reinvested to generate additional earnings.

Withdrawing funds early from your retirement savings could also mean you will miss out from the compound growth of your investment, which will reduce the amount of money you will have available in your retirement years. 

For example, suppose you withdraw a certain amount from your retirement account that could have earned an average annual return of 5% over 20 years. If you withdraw that money now, you forfeit all the future interest it would have compounded.

Therefore, pulling funds out early means you will have less in the account to grow, and there won’t be compounding, which is foundational to building substantial retirement savings. This is why it is generally recommended that one should leave retirement savings untouched to fully benefit from compound interest, so you can have more money by the time you retire.

Should I Withdraw From My Retirement Savings?

Despite the consequences, there are still some situations that warrants early withdrawal. But you know the choice is yours. If there are other alternatives you can consider, you may want to go for them. Also, you don’t have to empty your retirement savings account, remember there is possible tax implication. However, before you take any major financial step, it’s good you speak with a financial advisor, so you can understand what you’re getting yourself into. If you’re battling with debt, you could speak with one of our debt experts at EmpireOne Credit so we can assist you.

What to Do to Grow Your Retirement Savings Back 

If you’ve had to withdraw from your retirement savings early, it’s important to have a plan to replenish those funds and get back on track towards your retirement goals.

Increase Contributions

As soon as your financial situation gets better, increase your contributions to your retirement accounts. Your retirement fund is for your future, and you don’t want to overlook it. 

If you are 50 years old or older, you can make catch-up contributions to your retirement accounts. This allows you to contribute additional funds above the standard limit which helps you accelerate the growth of your savings.

Reassess Your Budget

Review and adjust your budget to find extra savings that can be redirected towards your retirement accounts. Cutting down on non-essential expenses can free up more money for retirement savings.

Automate Savings

Set up automatic transfers to your retirement accounts to ensure consistent contributions. Automating your savings can help keep your retirement goals on track without having to think about it every month.

Work Longer 

If possible, you can also consider delaying retirement to extend the accumulation phase of your retirement savings. Working a few extra years can provide additional time to contribute and allow your investments more time to grow.

Bottom Line

Going forward, try to avoid further withdrawals from your retirement savings. Just because you have made a withdrawal in the past doesn’t mean you should see it as a way to manage your finances. Remember there are tax implications, and asides that, your retirement savings is for the future, so don’t use it as a debt relief option.

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