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3 Signs You Shouldn’t Lock Your Money in a Retirement Account in 2023

The advantages of retirement accounts are pretty well known: They enable you to invest for your future and score some nice tax breaks. You might even get an employer match, depending on the account you use. But retirement accounts also have some disadvantages.

For starters, they usually require you to lock up your money until you're at least 59 1/2. Withdrawing earlier could result in steep penalties. Because of this, you might not want to put any money in a retirement account in 2023 if any of the three scenarios below apply to you.

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1. You don't have an emergency fund

Emergency funds are the spare cash you keep on hand to help cover unexpected costs. This includes hospital bills, insurance claims, or repair bills. You can also use your emergency fund to cover your household expenses if you lose your job. If you don't already have an emergency fund, building one should be your top financial priority. Otherwise, you might be forced to take on debt or sell investments when an unplanned bill arises.

You should have at least three months of living expenses in your emergency fund, but many feel more comfortable saving six to 12 months of expenses. If that sounds like too much, set a smaller goal and see if you can work up to a larger amount over time.

You should keep your emergency fund in a high-yield savings account where you can access it at any time. You don't want to place this money in a retirement account, because you'll run into problems with taxes and penalties should you need to withdraw it before retirement. If your portfolio is down at the time, you may also have to sell your investments at a loss, which could hurt the growth of your savings.

2. You have a lot of high-interest debt

High-interest credit card or payday loan debt can quickly spiral out of control and may cost you hundreds or even thousands of dollars in interest each year. Letting these debts stack up is likely to hamper your ability to save for your other financial goals, including retirement, so paying them off should be your top priority.

In this scenario, it's not advantageous to lock any of your money away in a retirement account, because that will just reduce the amount you have available for debt repayment. And even if you invest for retirement while paying off your debt, there's still a good chance you lose more in the interest payments than you earn from your portfolio.

Make sure you at least cover the minimum payment on all of your credit cards to avoid late fees. Then, put everything you have toward your highest-interest debt first. When that's paid off, move on to the next balance with the highest interest rate, and so on.

If you're struggling to make progress with this strategy, consider opening a balance transfer credit card or taking out a personal loan. Balance transfer cards temporarily halt the growth of your outstanding balance so you can get out of debt more quickly, but there are one-time fees associated with this. Personal loans give you a predictable monthly payment so you won't have to worry about your balance growing over time, but interest rates can still be high, especially for those with poor credit.

Once you've paid off your high-interest debt, you can reevaluate your financial priorities and put money toward retirement savings once again if that suits you. You may also want to redo your budget to ensure you don't fall back into debt.

3. You plan to retire before 59 1/2

Those planning an early retirement may prefer to keep some of their savings outside of a retirement account to avoid owing penalties. Taking money out of a retirement account before 59 1/2 usually requires you to pay a 10% early withdrawal penalty. You'll also owe taxes if the money is from a tax-deferred account.

There are ways around this penalty. You can withdraw Roth contributions penalty-free at any age, for example. You are also allowed to make early withdrawals without penalty for certain things, like large medical expenses or educational expenses. But it's often easier to save some money outside of a retirement account.

Think about how much you estimate you'll spend before you reach 59 1/2 and try to save for this in a taxable brokerage account. These accounts don't offer the same tax benefits as retirement accounts, but they also have no limitations on how much you contribute each year, what you invest in, or when you withdraw your funds. So you can rely upon this money first and then switch to your retirement accounts when you can access them penalty-free.

If you aren't able to save for retirement this year, that's OK. Decide how you will use your extra cash and when you've met your other goals, get back to saving for retirement. Remember to check in with yourself at least once per year to ensure you're still on track for your goals.

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