YOU’RE probably one of those employees wanting to tap your 401(k), 403(b), or other retirement accounts to get you through dire financial need. With unemployment rate hovering at more than 12% and consumer spend- ing continuously increasing, your choices must have been exhaust- ed so you’re left with no choice.
You assume withdrawing your retirement savings should come in uncomplicated and effortless; after all, it’s yours.
But doing so should be dealt with great caution and prudence as it comes with costs.
Hardship facts
A hardship withdrawal and loan are two distinct methods. Withdrawal poses more challenges and costs than taking out a loan. Once withdrawn, you lose the option to put it back to the savings account and become a taxable event; meaning, you’d have to pay your taxes relevant to your tax bracket.
The IRS considers it this way: the money that went to the ac- count was tax-free so once it’s taken out of the account, it be- comes a “source of income” that’s added to your annual gross income. (Remember, the only things tax free in America are life insurance and Roth IRA).
Realizing that workers would not want to put substantial amount of savings through many years without any access to it, legislation has devised terms and conditions for workers to be able to take hardship withdrawal.
They include: To buy a primary residence. To prevent foreclosure or eviction from your home. To pay college tuition for your-
self or a dependent, provided the tuition is due within the next 12 months.
To pay un-reimbursed medical expenses for you or your dependents.
But the IRS still discourages these withdrawals by imposing a 10% penalty if you’re less than 59 1⁄2 years of age. However, you could qualify for a waiver of early withdrawal penalty if you meet one of the following:
You become totally disabled.
Direct rollover to an Individual Retirement Account (IRA).
You are in debt for medical expenses that exceed 7.5% of your adjusted gross income.
You are required by court order to give the money to your divorced spouse, a child, or a de- pendent.
You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 591⁄2, whichever is longer)..
Taking a loan
As opposed to withdrawal, you should check if you could take a loan instead. Loans are not subject to the same strict rules as withdrawal and they are tax and penalty-free, as long as you are employed by the same employer.
Generally, you could loan up to 50% of the total value of the in- vestment though terms and conditions can differ by the plan car- rier. The loan is usually paid back through salary deductions within 5 years while you continue making additional contributions.
But as soon as you leave your employer, the loan can’t be re- paid and is treated as a distribution subject to the same taxes and penalties as a withdrawal.
Getting financial advice
In conclusion, taking money out of your retirement should be thought out carefully. You don’t tap it to finance vacations and buy discretionary items. You only use it as a last resort to cover financial emergencies. And even if you decide taking a withdrawal is the only choice, talk to a financial ad- visor first. Your tax preparer or financial planner is a great source. At least you get an overview of its tax ramifications and perhaps, staggering withdrawals will turn useful in the long run.
***
Evangeline is a California registered tax preparer, a legal document assistant for the general public, and a freelance paralegal offering assistance to various attorneys. She can be reached at her office at 2451 Colorado Blvd. #2, Eagle Rock, CA 90041 or at her marketing location inside the Eagle Rock Plaza. Her phone number is (323) 550-1869 or you can check her website at: www.evangelinegiron.net. She is a member of the court-endorsed California Association of Legal Document Assistant (CALDA) and an Associate Member (Non-attorney) of the LA County Bar Association (LACBA).
***
Note: Evangeline is not an attorney nor does she provide legal advice. She is a bonded and registered Legal Document Assistant and prepares legal documents per the specific direction of clients.
