Saving for retirement in an IRA is a good way to secure your financial future. But this year in particular, there may be a few specific moves you’re thinking of making with your IRA that could really set you back from achieving that goal. Here are three to steer clear of.
1. Taking an early withdrawal to buy a home
Mortgage rates have fallen to record lows this year, so many buyers are clamoring to purchase homes. While taking a withdrawal from an IRA before age 59 1/2 normally results in a 10% penalty, there’s an exception for first-time homebuyers — namely, you’re allowed to withdraw up to $10,000 from your IRA penalty-free to purchase a primary residence. But as appealing as that option might be right now given the way mortgage rates are trending, you’re better off leaving your money alone.
For one thing, though you’ll avoid a penalty if you take an IRA withdrawal for homebuying purposes, you’ll still be taxed on your distribution. Also, the more money you take out of your IRA today, the less you’ll have for retirement, when you really need it. And remember, you won’t just be missing the principal amount you remove; you’ll lose out on the ability to grow that money.
Imagine you withdraw $10,000 this year to buy a home and you don’t retire for another 30. If your IRA investments normally give you a 7% average annual return, by removing that $10,000, you’ll be $76,000 shy by the time you end your career.
2. Taking a CARES Act withdrawal when you have other options
The CARES Act, which was passed in March to provide financial relief during the coronavirus crisis, allows you to remove up to $100,000 from your IRA if you’ve been impacted by the pandemic. But if you have other ways to access money in a pinch, you’re better off doing so. We just saw how much an early $10,000 IRA withdrawal could impact your retirement income. Well, imagine if you were to take out more than that. You could wind up with a serious shortfall on your hands as a senior.
Before you tap your IRA, see if it’s possible to borrow money affordably, whether via a home equity loan or a personal loan. Though you’ll pay some interest on that debt, it could still make sense, financially speaking, to go that route rather than lose out on what could be substantial growth in your IRA.
3. Pausing contributions when you still have a job
A lot of people are pulling back on retirement plan contributions this year and focusing on their immediate needs. If you’re short on emergency savings or have seen your income decline, then hitting pause on your IRA contributions is a reasonable (and even smart) idea. But if your earnings have held steady and you’re in a good place with regard to your emergency fund, then there’s no reason to stop putting money into your IRA.
The savvier you are in managing your IRA, the better off you’ll be in retirement. Though the above moves may be tempting right now, it’s best to avoid them if possible so you don’t wind up cash-strapped once your senior years arrive.
