Prepared by Susan Clifford, CPA – Principal
While we all realize that we should be saving for retirement, some of us are reluctant to do so because we worry about tying up our money for decades when we might need it for an emergency long before retirement age. If that is your concern, you can stop worrying and start contributing.
In a true emergency, an unforeseen death or disability, or even just something particularly expensive (think first-time home or higher education), you may be able to access your money and avoid the 10% penalty designed to discourage early distributions. You pay taxes only on the income portion of the distribution, tax you would have paid anyway had the investments been in a non-retirement account. The rules differ between qualified plans and IRAs, so you should learn more before deciding which retirement vehicle might better serve your needs. And remember, if your employer offers to match contributions to a retirement plan, not contributing the minimum amount required to receive the full match is the equivalent of turning down free money. Additional retirement savings can go into whichever vehicle gives you the emergency out you think you are most likely to need.
Learn more about early distributions rules for both qualified plans and IRAs.