5 financial penalties that could cost you a LOT

5 financial penalties that could cost you a LOT

When you watch sports, the first thought that comes to mind when a player commits a penalty is, “That wasn’t a smart move. Why did you do that?”

When it comes to your finances, there are a lot of unintentional, not-so-smart things you can do that will cost you a significant amount in penalties.

Remember: Any money you spend on financial penalty fees is cash that you could be saving for retirement.

Here are five penalties you should be on the look-out for along with tips on what you can do to avoid them.

1. Late payment fees

Whether it’s your mortgage, a business loan, credit card, car loan or virtually anything you’re billed for and make regular payments on, you’ll be charged a late fee if a payment does not arrive on time.

Late fees are easy to avoid and there’s never a reason to pay them. Set-up automatic payments. Most companies offer this option or you can schedule them through your bank. Time your payments so you hold on to your money as long as possible (every day of interest counts!) without missing your deadline.

Tip: If you set up automatic payments for your credit cards, make it a point to review your statements. Look for errors or possible signs of cyber theft. Report any unusual activity to your credit card provider.

2. Increased interest rates

Another consequence of late payments is that financial companies will increase your interest rates. Two missed payments on a credit card and your rates on existing balances can go up. Enough late payments on different types of loans over time will lower your credit score, which will raise the interest rates you pay on all types of borrowing including mortgages and auto loans.

Again, setting up automatic payments will help you avoid having late payments impact your credit rating and associated interest rates.

3. “Bad habit” penalties

Smoking, drinking, poor driving and other so-called “bad habits” will lead to higher insurance premiums. Insurance companies base premiums on risk factors. Risks — things that you do that could impact your health and safety — or that of others — will trigger “penalties” that raise your rates. These rate increases will add-up to thousands of dollars over time, which is money you could be saving for retirement.

If you’re looking for a reason to quit a bad habit such as smoking or drinking, here’s one that comes with a significant financial benefit.

If you need a reason to improve a skill you’re not good at — such as driving — this is a perfect one. Taking an accredited class to improve your driving could lower your auto insurance premiums and help begin to correct a poor driving record.

4. The ten percent retirement withdrawal penalty

In most cases, you will be charged a ten percent penalty if you take money out of your IRA, 401(k) or similar retirement plan prior to age 59-1/2.

The easiest — and best — way to avoid this penalty is to keep your money in your retirement accounts until you retire. Money saved for retirement is money that should be used for it.

Unfortunately, personal and family emergencies all-to-frequently force people to withdraw retirement money prior to age 59-1/2. Here are some exceptions that let you to do so without incurring the penalty:

  1. You stop working after age 55 (early voluntary or non-voluntary retirement)
  2. You leave employment after age 50 if you’ve worked in a public safety profession, such as a police officer, firefighter or emergency medical service provider, for a government entity (early retirement for people in stressful, high-burnout jobs)
  3. You become totally and permanently disabled (under IRS rules)
  4. You have high medical expenses that are not covered by insurance
  5. You are forced to pay off a levy by the IRS
  6. You are required to pay court-ordered child care costs
  7. You’re a military reservist and are called into active duty
  8. You use the money for a down-payment on a first home
  9. You use the money to pay education expenses
  10. You set-up a Series of Substantially Equal Periodic Payments, in which you agree to continue to take the same amount from your account for five years or until you reach age 59½, whichever is longer. There are different ways you can approach this complex transaction, and it’s critical that you work with a financial or tax professional if you pursue it
  11. You’re required to transfer assets to an ex-spouse because of a divorce decree
  12. If you die, your beneficiaries are able to take distributions from your 401k without penalty
  13. You convert assets from a 401(k) to an IRA or Roth IRA.

The rules about avoiding the ten percent penalty are complex. Work with a professional to get it right. The amount you spend hiring one will be relatively small compared to what you’ll pay if you have to give the IRS ten percent of your emergency retirement plan withdrawals because of an error.

5. The granddaddy of all financial penalties

Once you turn age 70-1/2, the government requires you to take a prescribed amount out of your IRA annually. if you don’t do this by April 1 of each year, the IRS will levy a 50 percent penalty on the amount you failed to withdraw from your accounts.

Calculating the withdrawal rate is based on your life expectancy, that of your beneficiary and the number of IRAs you hold. Depending on the size of your IRA, this penalty can be very large.

It’s easy to avoid this very significant fine if you work with a financial advisor or other professional to build a sound retirement distribution strategy. Any amount you pay a financial professional for this service could save you a significant amount in penalties.


Make it a point to avoid penalties that will force you to pay unnecessary fees to financial companies or the government. Doing so will give you more money to save for retirement and prevent a drain on your retirement assets.

Another easy way to find more money for retirement? Start an online business. Setting-up one takes little up-front capital or know-how. And you can work when and how often you want to earn the money you need.

What are you waiting for? Learn how you can jumpstart saving for retirement by starting an online business.

If you liked this article, then you might also like these:

Retirement Planning Mistake 3: Don’t Start Saving Early Enough

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