05 Jul When Should I Take Money From My Retirement Plan?
Have you ever considered tapping into your retirement funds when money gets tight? If so, you’re not alone. It’s hard to see that money sitting there when you could really use it, right?
However, before you borrow or withdraw money from your retirement plan, you need to ask yourself some important questions and consider the ramifications of this decision.
#1 Does your retirement plan allow you to borrow or withdraw funds?
You’ll need to research and determine if your specific plan allows withdrawals and under which circumstances. Of course, consider taking money from your retirement account as your “hail Mary”; do everything you can do to obtain the money elsewhere before taking it from your retirement account.
#2 How much does your plan allow you to borrow or withdraw?
The answer to this question all depends on your plan and how much you have saved. Usually, you won’t be allowed to borrow or withdraw the entire amount, so keep that in mind. And in general, you can’t take out more than you’ve deposited into the plan. Check with your specific plan to get the guidelines about how much you can borrow or withdraw.
#3 What are the fees you can expect to pay for early withdrawal or borrowing from your retirement account?
You’ll want to fully understand what the early withdrawal fees are (usually 10%) and how much you’ll have to pay in taxes to the IRS.
There are some exceptions. The IRS sometimes waives the 10% fee if you demonstrate a “financial hardship” (with no other resources to draw on), such as purchasing your first home, paying expenses after a medical incident (for you, your spouse, or children), paying funeral costs (for your parent, spouse, or children), paying college costs for your children, or using funds to avoid eviction or foreclosure.
You’ll need to submit your hardship request in writing to your employer, who will determine if you qualify or not. And you may still end up paying federal and state income tax on this income.
#4 If you borrow from your retirement account, what are the requirements for paying it back?
If you borrow from your retirement account, there’s no fee as long as you pay it back within a certain amount of time (usually five years—but check your plan for specifics). If you don’t pay it back within a certain amount of time, it’s considered a withdrawal instead of a loan and is subject to all the taxes and fees, including the 10% federal tax penalty and regular federal and state income tax (based on which tax bracket you’re in).
#5 Are there advantages to borrowing from your retirement account?
You pay no fees or penalties as long as you repay the loan on time. Additionally, the interest rate for your loan must be comparable to the current rates being charged by other financial institutions. Finally, the interest you pay is actually paid back to yourself instead of to the lending institution. How great is that?
#6 Are there disadvantages to borrowing from your retirement account?
Not paying your loan back on time means you’ll be slapped with taxes and fees. If you stop working for your employer, you’ll only have 60 days to pay back the loan (unless your plan specifies otherwise). You also lose out on your retirement account increasing as much as it would have if you had left the funds in the account. This means less earnings and less to live on when you retire.
#7 Are there advantages to withdrawing from your retirement account for a hardship situation?
If you have no other assets to tap into, can’t get a regular loan elsewhere, and your retirement plan doesn’t let you borrow from it, then you don’t have many other choices other than withdrawal. At least you have something to pull from to help you out in your hardship, and hopefully you can avoid some of the penalties and fees for early withdrawal. (See #3 above.)
#8 Are there disadvantages to withdrawing from your retirement account for a hardship situation?
With a hardship withdrawal, you are reducing the amount of money you have in your account, which will significantly affect how much you end up with when you retire. You may also have to pay federal and state income tax on the income, along with a federal penalty of 10% if you’re under age 59½.
Also, you might be banned from contributing to your retirement account for many months after a hardship withdrawal (which, of course, affects how much money you’ll ultimately end up with when you retire).
#9 Are you willing to deal with the consequences of borrowing or withdrawing from your retirement funds?
You need to understand that you’re risking not having enough money during your retirement years if you take money out now (no matter how “good” of a reason you may have). These funds are meant to not be touched so that you’ll be set up well in your later years instead of ending up destitute. That’s why the penalties are stiff—to discourage people from using the money in these accounts.
You will face very real tax penalties and other fees if you take money out of your retirement account before age 59½.
WHAT TO DO INSTEAD!
If you’re not sure that you want to borrow or withdraw money from your retirement account after reading this, then consider some other options to come up with the money you need. Get an extra job, sell some valuable items, apply for a personal, short-term loan (beware of interest rates), or rework your budget.
And remember, the good folks at www.russellandcompany.com are just a phone call, email, or face-to-face conversation away. Let them put their expertise to work for you and your situation.
This newsletter was prepared by a third party company to be used on the Russell & Company and Simple Money Tips for Women websites.
