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Diversification, Profitability and Added Value
IT IS NOW POSSIBLE TO WITHDRAW CONTRIBUTIONS MADE TO PENSION PLANS THAT ARE AT LEAST 10 YEARS OLD.
Early withdrawal from a pension plan is a decision that can have very unpleasant tax consequences.
First and foremost, it is crucial to understand that pension plans were designed as a long-term savings instrument with significant tax benefits. When we make contributions, we receive deductions from our taxable income in the Personal Income Tax (IRPF). However, this benefit comes with a catch: the money is “locked” until retirement, unless in very specific situations. If we decide to withdraw the plan early, we face several tax surprises that can be quite impactful:
- Taxation as income from work: The amount withdrawn is considered additional income and is added to our earnings for the current year. This could push us into a higher tax bracket, meaning we will pay a higher percentage of tax not only on the withdrawal itself but potentially on all our income for that year.
- Loss of accumulated tax advantages: For years, we have been “deferring” the payment of taxes on our contributions. By withdrawing early, this tax advantage vanishes instantly, and we find ourselves paying taxes on amounts that were previously tax-exempt.
- Lack of installment options: Unlike when a pension plan is cashed out at retirement, where there are options to spread the payments and thus distribute the tax burden, an early withdrawal usually involves receiving the entire amount at once, maximizing the tax impact.
- Possible penalties: Depending on the specific conditions of the plan and current regulations, we may face additional penalties for early withdrawal.
- Impact on other benefits or aid: A sudden increase in income could affect our eligibility for certain social benefits or assistance based on income levels.
As a result, withdrawing from a pension plan early can seriously erode the value of savings accumulated over the years. Furthermore, from a macroeconomic perspective, large-scale early withdrawals could have negative implications for the social security system as a whole, as these instruments are designed to supplement public pensions and ease pressure on the system. For all these reasons, although it may be tempting to access that money early, it is important to carefully consider all options before withdrawing a pension plan prematurely, seek professional advice to fully understand the tax implications, and explore alternatives that may be more beneficial in the long term without significantly compromising our financial future.
