Today, we have a guest post from Brian Rodriguez of our sister company, Freedom Tax Relief.
If you need to cover your bills or pay off some extra debt, $20,000 dollars in your 401K or IRA can be very tempting. However, before you withdraw from your account, here are a few things to keep in mind.
Early Withdrawal Penalties
Regardless of whether you use funds from a 401K, 403B, or IRA, if you withdraw funds before the age of 59 ½ years old, there will be penalties. The usual IRS penalty is 10%, but the amount you withdraw will also be added to your taxable income, which can put you in a higher tax bracket and cause additional penalties. Thoroughly do your research before you withdraw money from your retirement account.
Beware of the tax-free rollover.
If you have an IRA, you may have heard of this option. You can use the funds in your IRA for a short period of time, if you have the ability and intention of paying it back. You have 60 days to do this, but if you don’t refund it back to your IRA within the allotted time, you will face penalty charges. Know the pros and cons before using a tax-free rollover.
Taking a loan against your 401K.
Leveraging funds in your 401K without actually removing it may seem like a good option, but it’s simply not that simple. It may be convenient and will usually come with a lower interest rate, but there is plenty to consider before you take a loan against your 401K. If you lose your job, or leave your job while you have an open loan against your 401K, you will have to pay the balance in full – usually within 60 days of termination. The interest you pay yourself is usually less than the returns you are making on the 401K investments, meaning you are losing money every month.
Don’t lose your protection.
Your retirement accounts are often protected in bankruptcy. Keeping your funds in a qualifying 401K, 401B, and some IRAs can shelter them from creditors. Sometimes, we are quick to cash out on these funds, forgetting the penalties that come with them. Keep your money protected for as long as you can, and always look to roll-over your funds when necessary.
Sooner or later, you will need the money in your retirement account, so keep saving for as long as you can. If you have a true hardship that forces you to tap into your retirement funds, there are options to help you avoid costly penalties.
For more information on taxes, check out our sister company, Freedom Tax Relief, and speak to one our tax debt specialists.”
- Brian Rodriguez