Right now many are facing tough financial times and may be thinking of raiding their retirement accounts. But no matter how tough circumstances get, it’s important to try and keep one’s hands out of the retirement funds.
In light of the recent economic downturn, the Transamerica Center for Retirement Studies reported fewer than 10 percent have taken a hardship withdrawal or a loan in the last 12 months. Doing so could have serious financial consequences. So, before you decide to raid the 401(k) and other tax-advantaged retirement savings consider this:
Options are limited for hardship withdrawal: Depending on your plan rules, you may qualify if you use the money to pay down medical expenses, avoid foreclosure on your primary home, pay college tuition, become disabled or need to cover funeral expenses.
You’ll generally pay penalties and taxes: Qualifying for a hardship withdrawal, doesn’t automatically exempt you from the early withdrawal penalties of 10 percent to federal and 2.5 percent to California if you are under the age of 59.5. Also the distribution is taxable and you may be subject to federal and state taxes. This could mean that you may only be able to keep 50 percent or so of the money you withdraw.
Be careful with loans: If your employer allows loans, you may have five years to pay it back without having to pay penalties or taxes. In most cases you may be able to borrow up to the lesser of $50,000 or 50 percent of the vested balance. But what happens if you’re fired or you quit? Not so nice — you’ll have to pay back the outstanding balance of the loan within 60 days. If you can’t do it, you’ll owe taxes and the penalty on what is unpaid.
Loss of account appreciation: Keep in mind that while money is out of the retirement account any amount of investment gain will be lost. It is best to stay invested for the long term.
For more information contact Rebecca Robins, CPA/PFS, CFP™, CA Insurance Lic#0D75745 at 661-222-2331, located at 25129 The Old Road, Suite 105 in Stevenson Ranch. Securities offered through Associated Securities Corp. (ASC), member FINRA/SIPC. Advisory services offered through Associated Planners Investment Advisory, Inc (APIA), ASC, David S. Reinders, CFP, Inc., Registered Investment Advisors. David S. Reinders, CFP, Inc. is not affiliated with ASC or APIA.