Retirement Withdrawals: Data Shows People Who Take Money Out Early Rarely Pay It Back

Most Americans know that saving for retirement is crucial for future financial security, but for many, it can be a struggle to keep contributions consistent over a lifetime. Additionally, sometimes life circumstances may necessitate taking money out of a retirement account to pay for unexpected expenses, something that obviously reduces the amount of money the account holder will have access to in retirement.

As Americans navigate how to save for retirement and plan their own retirement strategies, our FinanceBuzz research team wondered: Are people paying their retirement accounts back?

To better understand how common early withdrawals from retirement accounts are and why people take them, our FinanceBuzz team surveyed 1,000 U.S. adults. We found out how many have taken money out of their retirement accounts early, how much they withdrew, why they needed the money, and more.

Key findings

• 2 out of every 5 people with retirement accounts have taken money out of them early, including more than 10% that have done so multiple times.
  • Only 43% report paying back the amount withdrawn.
• About one-quarter of people (23%) regret taking money out of their retirement accounts early.
• More than 80% of people are unaware of an IRS change allowing a $1,000 emergency withdrawal.
• Personal debt is the #1 reason for making an early withdrawal, cited by nearly one-fourth (24%) of people who have taken an early withdrawal.

How many people are withdrawing money early and how are they doing it?

Retirement accounts like IRAs and 401(k)s are fairly common, with 53% of respondents in our survey indicating they currently have some kind of retirement savings. As the name implies, they are meant to be used once the account holder reaches retirement age, but there are plenty of reasons that people may choose to access their retirement funds before reaching that milestone.

Early withdrawals are fairly common, as 41% of people with retirement accounts have taken money out early. That includes 11% who have withdrawn funds from their retirement accounts multiple times.

These early withdrawals commonly come with a price for the account holder, as the IRS levies a 10% penalty on early withdrawals on top of taxes that typically need to be paid (though there are some ways to take early retirement withdrawals without penalty).

The vast majority of respondents who have taken money out of a retirement account early, 85%, said they had to pay these kinds of taxes and fees, while just 21% took money out as an untaxed loan, an approach that requires the full amount withdrawn to be paid back plus interest in order to avoid penalties.

How much are people taking out?

With taxes and penalties attached to early withdrawals, it would make sense that most people only take money out early when they absolutely need it to cover a major expense.

That sentiment is supported by the fact that the average amount of money withdrawn by respondents who have taken money out of their retirement accounts early is just a little over $15,000. That indicates that those who have actually taken money from their retirement accounts are doing so because they need a relatively large amount of money, and the need for those funds is great enough in the present that they are willing to risk impacting their future savings to access it.

One reason that this approach is risky is that not everyone fully pays back what they take out. Only 43% of people who have taken early withdrawals have paid them back fully, while a little more than a quarter (26%) have paid back some of what they took out. Around a third of early withdrawers (32%) have not paid anything back yet, and half of that total says they likely will never pay back what they took out early, which could be a costly mistake once they reach retirement age.

Why people are withdrawing early

With such large amounts of money being withdrawn from retirement accounts early despite the penalties, fees, and general risk involved, we wanted to explore the top reasons motivating people to take this approach when it comes to their retirement accounts.

Paying off personal debt, such as credit cards, home and auto loans, etc., is the most common reason people withdraw money from retirement accounts early, cited by nearly one out of every four people (24%) who have done so. More than one-fifth of people chose another option, with 21% saying recurring bills necessitated withdrawing funds from their retirement accounts early.

Other top reasons for early withdrawals include making a major purchase such as a new home or vehicle, which 19% chose. 18% said medical expenses not covered by insurance led them to take out money early, and the same percentage cited general personal emergencies as a motivating factor.

The final two reasons that at least 10% of early withdrawers chose were needing money to make home repairs (11%) and offsetting lost income (10%).

Taking advantage of penalty-free withdrawals

While early withdrawals from retirement accounts have almost always come with some kind of fee or penalty, a recent IRS change gives account holders penalty-free access to $1,000 in retirement funds under certain conditions.

With so many people needing access to emergency funds and taking them from their retirement accounts, this new rule could prove to be very beneficial.

Unfortunately, most people have no idea it exists, as more than 80% of respondents said they had no idea this change had been implemented. That includes more than half of people, 53%, that said they did not know about the rule but would consider utilizing it in the future. If they were to do so, they would join a small group that has already taken advantage of the new rule, something that just 5% of respondents say they have done.

Tips for maximizing your money, both before and during retirement

• Save for retirement as soon as possible. Saving for retirement is a huge part of making sure you have what you need in the future. When you start early, you have more time for investments to pay off and more time for markets to stabilize over time. That said, every bit you can save is helpful, even if you’re getting off to a later start.
• Make your money work for you. Investing money is a good way to make your money work for you and build wealth for your future. Our guide to the best investment apps can help you get started.
• Budget your money. In times when money is tight, budgeting can be helpful. Here are some of the best budgeting apps.

Methodology

FinanceBuzz surveyed 1,000 U.S. adults aged 18 or older using the Pollfish survey platform. Only respondents who indicated that they have at least one active retirement account were asked questions relating to withdrawals.