Your defined contribution (DC) account might seem like a good place to access money in a pinch, but dipping into your retirement savings may not be the best idea long-term.

Ideally, you’re planning and saving for surprise expenses before they arise.

Some expenses come to you unexpectedly, like the potholes that open up after winter weather eases. Others are catastrophic, like a flooding event that isn’t covered under your insurance. However large or small, a surprise expense might not be deserving of your hard-earned retirement savings. While the potential for immediate relief may seem like the perfect solution to your financial hurdle, accessing the money might leave your retirement dream with more than just skinned knees.

If you’re eligible for a DC withdrawal ¹ , taking money from your retirement savings might seem unavoidable if you’re faced with an expense your current savings can’t cover. While withdrawing your DC decreases your retirement savings, be aware that it will also affect how much you pay in taxes. Withdrawing your DC balance before age 59½ can subject you to a 10% federal tax penalty in addition to income taxes. A $40,000 withdrawal from your DC could result in a penalty of $4,000, in addition to the income taxes you’d owe on the money you withdrew. ²

An early DC withdrawal will affect your overall retirement savings and taxes and hinder the compound growth your account can experience over the years. Instead of falling back on your retirement savings, start an emergency fund if you haven’t already, and be ready if you’re faced with an expense you can’t dodge. Review your budget and see what you can cut back on or eliminate. INPRS has a growing list of resources that can help. Check out the INPRS Financial Wellness Guide and the Budgeting & Saving section of our digital magazine.

¹ PERF and TRF Hybrid members must be separated from their covered position for at least 30 days. As of January 1, 2021, if you are at least 59½ years of age and age and service eligible for normal retirement, then you may request a distribution of your DC even if you are an active PERF and TRF Hybrid member. No separation of employment is required.

PERF and TRF My Choice members can withdraw if they have a 30-day separation or are 62 and have five years of service.

² By January 31 of the year after you receive your distribution, you will receive a 1099-R form. Hold on to this to report income on your federal tax return.