Self-directed retirement saving has come up short in many ways when it comes to building long-term retirement security. But one of the most damaging trends has been the tendency among savers to make early withdrawals from their accounts.

Most experts aggressively discourage withdrawals, since they come with penalties and damage your long-term returns. The Internal Revenue Service only allows them  for limited and very specific purposes, including funding of medical expenses and funerals, paying mortgage debt or to avoid foreclosure or eviction.

A new report from The Urban Institute documents the reasons why early withdrawals occur. No big shockers here– the key reasons relate to unemployment, health emergencies and other situations that can add stress to households, such as the birth of a child.

But here’s one data point that jumped out at me: while 12 percent of early withdrawals occurred because of involuntary job termination, another 10 percent occurred when people changed jobs and took a cash-out rather than roll over their funds.

That points toward a need for greater education on the damage that can be done by tapping into retirement accounts. The Urban Institute report notes that recent changes in federal law requires employers to deliver stronger messages to departing employees on the dangers of tapping accounts. It also questions whether regulations intended to discourage withdrawals should be beefed up. But the researchers also noted studies showing that fewer people would participate in retirement accounts if accessibility rules are tightened.

This chart from The Urban Institute report summarizes the reasons for early withdrawals:

Source: The Urban Institute

Related posts:

1. Nearly half of job changers cashed out of 401(k) accounts in 2008
2. Final tally on 2008 retirement accounts shows 24 percent drop
3. More families raiding retirement accounts to pay for college
4. Health Savings Accounts have a limited role in funding retirement health, study says
5. Facing financial stress? Resist the urge to raid your 401(k)

Tags | 401(k), IRA