Mentally, it’s pretty hard to withdraw money from any investment vehicle, whether its funds in a money market account, a certificate of deposit, or your retirement fund. But in emergencies and times of imminent need, it’s a viable option.
Here’s what you need to know about making early withdrawals from your retirement fund.
It’s not difficult to withdraw your contributions early from your IRA or 401(k); it will just cost you. If you withdraw before you turn 65, the withdrawal amount will be subject to an income tax and, in some cases, another penalty.
Roth IRA contributions work a bit differently, since you’ve already paid taxes on the deposited amount. You will, however, have to check with your plan in order to see the taxes and penalties associated with withdrawing growth dollars.
If you’re going through severe financial hardship, you may qualify for an early distribution. The amount distributed will only cover the expressed need. You’ll need to prove that you can't get the funds from other sources - insurance, liquidation of assets and investments, pay, or commercial loans. Your employer will make this determination.
What qualifies? Medical expenses for yourself or your family, home purchase costs (not mortgage payments), education fees for yourself or family, imminent eviction or foreclosure, funeral expenses for yourself or family, and damages to the home.
If you want to take out a loan against your retirement plan, it has to be paid back. This is key; the loan isn't taxed if its repaid within the plan’s guidelines.
You can’t get a loan from an IRA-based plan, but profit-sharing, money purchases, 401(k)s, 401(b)s, and 457(b) plans can allow loans. You can only borrow up to 50 percent of the vested amount, but the ceiling is $50,000. Normally, you have to pay this back within five years with quarterly payments.
If you take a out a loan larger than the repayment ceiling or fail to pay it back according to your employer’s guidelines, it may be subject to a tax and penalty on the withdrawal.
Taxes and Penalties
As mentioned above, loans following plan guidelines won't be subject to a tax or penalty.
However, early distributions are subject to income taxes and a ten percent penalty, but there are some exceptions. Check out this chart by the IRS to see if your plan and withdrawal reason qualifies for any exemptions.
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The information in this article is not to be taken as financial or investing advice. Always seek the services of a Financial Advisor, Accountant or Financial Planner.