Half of Americans with retirement accounts have taken an early withdrawal

A majority of Americans have dipped into their retirement accounts before their golden years, a survey from Bankrate found.

Fully 51% of those with the accounts said they have taken an early withdrawal, including 20% who did so during the Covid-19 pandemic, according to the poll. The survey was conducted Oct. 20-22 among a sample of 2,225 U.S. adults.

Generation Z tapped into their savings at the highest rate. While only 18% took an early withdrawal pre-pandemic, 40% said they did so during or after March 2020. Baby boomers were the most likely to keep their accounts untouched amid Covid — 34% had taken an early withdrawal before the pandemic but only 6% did so during or after March 2020.

“Withdrawing money early from a retirement account costs you now, and it really costs you later,” said Greg McBride, Bankrate’s chief financial analyst.

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Early withdrawals from traditional individual retirement accounts and qualified plans, like 401(k) accounts, are generally subject to income tax and a 10% additional tax penalty. Together, that can chew up to anywhere from 20% to nearly 50% of your withdrawal, depending on your tax bracket, he pointed out.

With Roth IRAs, you can withdraw any of your contributions tax- and penalty free.

There are exceptions, however. The IRS allows you to take money out of your IRA or qualified plan penalty-free for certain expenses (listed here), including unreimbursed medical bills. The CARES Act also allowed those affected by the pandemic to take up to $100,000 from their retirement plans and IRAs penalty-free in 2020.

However, there is still a price to pay.

“The real cost comes from the lost compounding over time,” McBride said.

“Every dollar withdrawn today could be $10, $15, or $20 by the time you retire, so an early withdrawal robs your future nest egg of a significant sum.”

The survey also found that 52% of Americans feel like they are behind on their retirement savings. More than 21% said they are on the right track, and 11% said they were ahead of the game. The findings were in line with Bankrate’s 2019 poll.

Yet there is some good news. More than 24% said they are saving more now than they did before and almost 39% said they’re saving about the same amount.

If you are behind and need to get back on track with saving for retirement, there are simple things you can do.