4/4/2013 6:30 PM ET|
Smart ways to tap retirement savings
Ideally, you won't have to dip into your nest egg before you retire. If you do it, though, make sure you do it right.
Thinking of taking a withdrawal from a retirement account while you're still working? There's a lot to consider.
Understand there is a difference between taking a withdrawal and taking a loan from your employer-sponsored plan. Just as with a regular loan, when you take a loan from your 401k you will pay back the amount you take out, with interest. For the purposes of this article we're focusing just on withdrawals -- taking money out of your employer-sponsored retirement plan that you will not be able to pay back.
With that distinction out of the way, you'll need to review additional information to know what will be available to you.
From what plan type would you take the withdrawal?
401k: If you are younger than age 59 1/2 and still working for the employer offering the retirement plan, the IRS only allows you to take 401k withdrawals in the face of an immediate and heavy financial need. That could include:
- Medical expenses for you, your spouse or a dependent;
- Tuition and fees for college education for you, your spouse or a dependent;
- A home purchase;
- To prevent foreclosure or eviction;
- Repairing damage to your primary residence; or
- Funeral costs.
A hardship withdrawal, as described above for someone under the age of 59 1/2, will be subject to ordinary income tax and a 10% IRS early-withdrawal penalty.
Taking a hardship withdrawal from a 401k plan, subject to meeting the IRS requirements, may be possible though your employer may have additional requirements or more stringent rules. Check your plan document to see whether the option is available to you.
403b: The rules are essentially the same as those governing 401k withdrawals.
Thrift Savings Plan: TSP participants who wish to take a withdrawal must similarly prove a financial need. Unlike a 401k plan, if a significant need exists, the TSP is legally required to allow the withdrawal. After you've separated from employment, you can take a partial or full withdrawal prior to reaching age 59½. TSP early withdrawals are subject to ordinary income tax and a 10 percent IRS penalty.
457: The rules governing a 457 withdrawal are stricter. There must be an unforeseeable emergency, so home purchase and college tuition expenses aren't eligible criteria. If you've separated from employment, you can take a 457 withdrawal for any reason. It will be subject to ordinary income tax, but there is no additional IRS penalty.
Are you working past age 59 1/2?
If you're at retirement age but still working, there aren't IRS restrictions about withdrawals. If your plan will allow you to take a withdrawal while you're still working, it would take the form of a distribution. However, your plan document may be stricter than the IRS, so check to see whether you're eligible to take an over-59 1/2 in-service withdrawal. You may want to talk with a financial adviser before making this decision.
Is it worth it?
Your retirement nest egg could determine how you spend the final quarter or third of your life.
Withdrawing money from a retirement account before retirement age should be a last resort. A little less money invested (or a lot less) may not seem like a big deal to you right now. But you'll erode the benefits of compounding rapidly if you take early withdrawals. Actions you take now could directly affect the age at which you're able to retire and the lifestyle you're able to have during retirement.
Additionally, early withdrawals from many plan types trigger an IRS penalty that's just a tough pill to swallow.
Non-emergency situations, like paying for college and home purchases, may not warrant early withdrawals. Perhaps renting a home rather than buying one isn't your dream, but it's not the end of the world. And, with the availability of student loans and scholarships, it's difficult to justify upsetting your retirement plans to pay for college. After all, there's no such thing as a retirement scholarship!
Think long and hard before you take money out of your retirement nest egg. Consider contacting a financial adviser and a tax adviser to talk through your overall plan before making any decisions. Be certain it's a true emergency and you have no other way to get the money you need.
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if you are flirting with "borrowing" money from your retirement accounts, please think hard and honesty about how you got here. have you changed the details that created the issue?
granted medical bills are a mess - i'd never chastise someone for dealing with those issues.
but if you have excessive credit card bills, never own a car and always lease one, still go out to eat several times a week, gotta have that $7 coffee every morning, then i'd say you truly need to rethink how you personally live and spend money.
great advice. however, i wonder what are the "odds" of realistically or actually retiring off of a 401K or IRA? wonder what the real numbers are for that? you know, where is it in black and white in percentages of those who are actually able to retire and live as they did when they were working? what and where are those numbers or stats? seems nobody accounts for unemployment, underemployment, cost of living, low wages, low employer contributions and endless other factors that extinguish middle and lower class retirements. so, i'm guessing, "odds are", if you're born on the wrong side of the tracks, your more likely to retire from a 20+ year military enlistment than your are from retiring solely from the civilian workforce. i could be wrong. again, i don't see any data online. so, from what i can see, real world, seems like most retire into poverty, social security checks, retirement jobs, medical issues, reverse mortgages and work until death.
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