Touch Not the Retirement Fund, Thus Sayeth the Experts

This economy is no stranger to financial burdens. We are finding out how fast the mighty really can fall. If the mighty can fall so quickly, it is no wonder that some of us are falling. Sometimes you just have to do what you just have to do in order to financially survive this recession. Just do not do anything hastily, especially things that might hurt retirement or savings.

When financial times get tough, so do the decisions people have to make. Sometimes people have to figure out how they will get the money to pay the bills and sometimes people have to decide what bills they are going to pay this month. In that quest for extra cash, you should be very careful raiding the retirement funds. “This can be the most expensive cash you’ll ever withdraw,” says Ed Slott, an accountant in Rockville Centre, N.Y., whose specialty is retirement.

Early withdrawal of retirement savings from that IRA or that 401k can mean massive penalties and taxes. Unfortunately, to try to minimize this, it is suggested that you work with a financial advisor or accountant that specializes in retirement savings. The federal government usually charges a 10% penalty on money withdrawn from a 401k or IRA by those under retirement age (considered 59 ½).

Withdrawals of earnings and deductible contributions are subject to federal income taxes plus any taxes charged by your state and local jurisdictions. If you live in California, an early-withdrawal fee will be charged by the state. In a Roth IRA, contributions can always be withdrawn without penalty, but earnings can be taxed and penalized to the content of the government(s) that have jurisdiction over you (likely government, state, and local). This does not even count the fees to pay any advisor you may work with.

For people still investing in their company’s 401(k) plan and under retirement age, withdrawals generally are not even permitted unless labor there is terminated. There are, however, certain “hardship” exemptions which are strictly adhered to legally, including medical expenses, avoiding foreclosure on a home or funeral costs. Even so, those exemptions are still heavily taxed and penalized.

IRA rules are more lenient, allowing hardship withdrawals without the penalty, but the money will still be subject to steep taxes. In most cases, the only way for someone in a 401k under retirement age to avoid the penalties and taxes is to borrow from the 401k account. These loans can’t be more than 50% of the balance of the account or total more than $50,000. Here is the rub, though: it must be paid off within five years.

“Some companies will allow in-service withdrawals only for severe hardships; others don’t bother imposing restrictions,” says Frank Palmieri, a Princeton, N.J., benefits attorney. Anyone considering withdrawing money from a retirement account should consider it nearly mandatory to sit down with an accountant. You’ll want to consider the taxes and penalties hit which should be factored into how much money is withdrawn.

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