Times are hard for everyone. If you feel as if money is tight for you and your family, you’re not alone: over half of American families are currently living paycheck to paycheck. It’s a tough reality, but what can you do?
In desperate times, some families consider pulling money early from their retirement accounts. While this isn’t advisable, sometimes it is the only move in a time of impending financial disaster.
But do you know how to withdraw money from a retirement account without facing huge penalties? This can be essential knowledge if you’re thinking about taking money out earlier than you initially intended. Read on, and we’ll walk you through the information that you need to know.
Early Distribution Penalties
An IRA account is set up so that the money you put in stays in the account until your retirement years. If you want to pull the money out before, you do have that option, but not without paying a little extra.
Traditionally, an early distribution penalty applies anytime you take money from an IRA account before you are 59 and a half years old. The penalty is ten percent of the money you pull from the account, and this is on top of the income tax you’ll already need to pay on the withdrawal.
The penalty can be even higher, depending on the specifics of the situation. For example, if you’ve started a simple IRA in the past few years and need to pull money from it, the penalty can be as high as 25%.
If you have a 401k as opposed to an IRA account, it may be easier to avoid these penalties. You can withdraw money without a charge once you are over the age of 55. There are also more instances where you can take money out penalty-free, such as in the case of divorce.
With any retirement account, you might be able to take money out penalty-free if you’re a first-time homebuyer or if you are facing high medical bills. It’s important to talk to a financial expert to get more information about your particular retirement plan. By doing this, you can see what options might be available to you.
Avoiding Large Income Tax Fees
The money you withdraw from a retirement account isn’t completely free, even after you’ve reached the proper retirement age. You still need to pay an income tax on the money to the American government.
These withdrawals are seen as normal income, which means you’ll likely be taxed at the marginal tax rate that you are accustomed to. But, depending on the amount you plan to take out, you might accidentally bump yourself up to a higher marginal tax rate.
The last thing you want to do if you’re taking money from your account early is to lose much of it to taxes. Make sure you’re paying close attention to the tax brackets before making plans to withdraw money from one of your retirement accounts.
Make sure that you are doing the math on how much money you will actually get out of your account after taxes and fees. You don’t want to be surprised when you find what the actual sum that goes into your wallet will be. Knowing this number will help you compare withdrawal to other financial plans and make the right choice for you.
Other Ways To Avoid Withdrawal Penalties
There are a few other specific circumstances in which you might be able to avoid paying withdrawal penalties. These are not sure-fire ways, and their success might vary depending on your situation.
Much as high medical bills might be a cause to waive penalty fees, so might the high cost of health insurance itself. If you’ve been unemployed for a consecutive 12 weeks, you might be able to withdrawal from your IRA account without fear of penalty. This works just so long as these funds are going towards health insurance payments.
Similarly, if you are suffering from a physical or mental condition and are unable to work as a result, you are likely eligible for penalty-free withdrawals.
If you are studying at a qualified educational institution, you might be able to take out penalty-free funds to pay for school costs as well. This includes textbooks and supplies, but might even be able to cover things like room and board as well.
If you are currently active in the military, you might be able to take a penalty-free withdrawal from an IRA account in return for your service to the country. This waiving of fees is only eligible to service members currently in the field, and who have been active for more than one-hundred and seventy-nine days.
Last but not least, but if you inherited an IRA account, you would not need to pay early withdrawal fees if you go for the money before you turn 59 and a half. You will still need to pay income tax on these withdrawals, but the penalties you likely don’t have to worry about.
How To Withdraw Money From Retirement Accounts
When times are tough, it can be very helpful to know how to withdraw money from a retirement account. Though penalties can be steep for such early withdrawals, there are instances where you can avoid these fees and get the money that you need. The above information should be a handy reference for figuring out your own personal financial situation.
Need more advice or tips? Check out our personal finance page for more.