For Mark Roberts’ Use: You probably understand how important your retirement savings are. After all, you can’t count upon Social Security to provide for all of your needs in retirement, so the burden of preparing for a secure future rests on your shoulders.
But sometimes, it can be tempting to withdraw money from your retirement account. It’s hard to think about the future when you’re facing a dire emergency right now! In most cases, taking an early withdrawal from your retirement plan (before you reach age 59 ½) will trigger a 10 percent tax penalty from the IRS. But there are possible exceptions to this rule, depending upon the type of account you hold, such as:
- The account owner dies (in this case your beneficiary would be taking the withdrawal)
- You become disabled
- You incur significant medical expenses (certain rules apply)
- You lose your job and need to pay for health insurance in the meantime
- You need a down payment for a home (there is a $10,000 limit, and you can only use this exception once)
- You are subject to a Substantially Equal Periodic Payment plan (SEPP)
- You want to use the money for college tuition (for yourself or a dependent)
- You separate from your employer
- You’re subject to a Qualified Domestic Relations Order (QRDO)
- To reduce excess contributions
- To reduce excess elective deferrals
Note that all of these exceptions do not apply to all retirement accounts. For example, employer-sponsored retirement plans and Individual Retirement Accounts (IRAs) are subject to different rules. These are just examples of the situations in which you might be allowed to take an early withdrawal, without triggering a penalty. You should discuss your exact situation with your plan administrator before making any assumptions.
But wait! Even if your situation qualifies you for one of the above exceptions, taking an early withdrawal from your retirement account is almost always a bad idea. Remember that even if you can pay yourself back for the amount that you borrowed, there is no way to make up for lost time. All of the compounding interest that you would have earned is gone for good.
It’s always best to find another way to fund your emergency situation. To discuss this matter in more detail, give us a call and we’ll be happy to help. It’s very possible that you’re overlooking another possible solution to your problem. We can help you identify it, and keep your retirement plan intact and healthy.