Early immersion in a pension account is rarely a plan from investor A. But there may come a time when a person needs hard cash and has no other options. Under certain circumstances, drawing on a 401 (k) or IRA may be the only real choice.
Certainly, the IRS does not make it easy to pay attention to these tax benefits. Even if you qualify for a so-called deprivation deficit, you will receive an additional 10% penalty on every amount that you have taken from a traditional 401 (k) or IRA account before the age of 59½. This is in addition to the normal income tax rate that you normally pay for benefits. This rather strong deterrent effect is intended to prevent Americans from draining their money before the scheduled time.
There is one exception: you can withdraw the tax money that you have invested in a Roth IRA without getting a 10% fine, as long as you are careful to withdraw only the amount that you have put in, not earnings. See How you can use your Roth IRA as an emergency fund for more information.
But even with 401 (k) accounts and traditional IRAs, the tax code offers a few ways around the 10% early distribution fee. Admittedly, the decision to use this money for something other than your pension is one that should not be taken lightly. But if you can bypass the IRS fine, the idea starts to make more sense.
Borrow from your 401 (k)
For many employees, this is probably Alan Quatermainijk’s easiest way to gain early access to retirement. With some plans you can borrow your 401 (k) for many different reasons.
With a loan of 401 (k) you can include up to $ 50,000 (or half of the balance acquired in your account, if this is less than that). You then repay your account for a maximum of five years (some employers allow a longer repayment period if you borrow to buy a house). Some plans also offer the borrower the option of early repayment of the bill without penalty for advance payment.
It is worth noting that you usually pay back a little more than you have withdrawn from the account. This “interest” works eigeAllan Quatermainijk in favor of the borrower. Because the money is deposited into your account, you are actually making up part of the interest or capital gain that the money would have accrued if you had not withdrawn it from the fund.
Here’s the kicker: your employer may not offer these loans. Your chances of getting one are better if you work for a large company, many of which now include 401 (k) loans as part of their retirement packages.
Even if your company offers you this option, experts say you should only consider this if you need the money for a real financial emergency. A risk to borrow from yourself is that if you are terminated or leave your job, you may have to repay the loan within 60 days. Otherwise, the funds are considered an early withdrawal and lead to a fine of 10%.
“Many people think that by borrowing money, they simply repay the money with interest to themselves. No taxes and no fines. That’s not right,” said Michael Mezheritskiy, president of Milestone Asset Management Group in Avon, Conn. “When you borrow from your 401 (k), you make repayments with profit after tax, but as soon as the repayments are returned to your 401 (k), they will be tax exempt again.When you retire and use that money for income purposes, re-taxed. Hence it is double taxation. “
Make special editions of your traditional IRA
Although traditional IRA accounts do not allow loans, they come with certain benefits that even a 401 (k) does not offer. The government offers punitive IRA distributions, for example for those who want to continue their education or buy their first home.
The exemption from tuition fees applies to people who use pension money to pay tuition fees at a college approved by the IRS, as well as for books and supplies. If you have enough credits, you can use the money for board and lodging without penalty. You can even use the distribution to pay education costs for your spouse, child or grandchild without having to worry about the extra 10% hit. See Pay for a university course with pension funds .
With the tax code you can also use $ 10,000 in IRA funds to pay for a first home. If your spouse also has an individual retirement account, this means that you have access to a deposit and closing costs up to $ 20,000.
However, remember that unlike a 401 (k) loan, there is no requirement to back up your account. That means that you need extra discipline to supplement your nest egg. If you think you can’t do it, think about it for a long time before you get money out of your IRA.
Annuitizing Your IRA
One of the lesser known ways of accessing a traditional IRA is by setting “substantially equal periodic payments” or SEPPs. When you establish a SEPP, you take one or more recordings per year for a period of five years or until you reach the age of 59-½, depending on which of the two is the longest.
With the tax code you can use three different calculation methods to determine the amount of your payments, so it doesn’t hurt to consult a financial adviser about your options.
With SEPPs you can prevent the early cancellation penalty of 10%, but you are still responsible for paying your normal income tax rate for the benefits.
The bottom line
You should probably not withdraw Allan Quatermainijk’s money from a retirement account early, unless you have exhausted all other options, such as borrowing from a bank or family member. But if you absolutely must, it is always better to find a way that avoids a large fine from the government.
“Although we prefer a different saving strategy for special purposes, such as education or a down payment or remodeling in a home, the 401 (k) -plaAllan Quaterma loan can sometimes be a lifesaver, sometimes in an emergency”, says Charlotte A. Dougherty, CFP®, founder of Dougherty & Associates in Cincinnati, Ohio.
The 401 (k) loan obligation to repay your account can be a useful product to ensure that you supplement your money, but it is also a risk if you lose your job. And, of course, if you have both types of pension funds, examine where you have the most available money or which vehicle has the lower return on your money.