Why You Shouldn't Steal From Yourself
It often seems that the easiest way to pay for a new house, medical bills, or a family member’s education is to dip into the retirement fund you’ve been working so hard to build.
Think again. Withdrawals from IRAs, Roth IRAs, and 401(k)s are considered “early distributions,” if you withdraw before age 59 ½, then you will be penalized. Early withdrawals are hit with a 10% penalty by the federal government, and possibly an additional 10% withdrawal tax depending on your state and applicable income taxes on the distribution itself. This means you will lose some of the money you originally deposited—some of which has already been taxed!
Of course, unfortunate and catastrophic events may occur, causing you to need access to this money. There are some exceptions when people may withdraw from their retirement account without penalty:
- You become disabled
- You have medical expenses that make up 7.5% or more of your adjusted gross income
- You are using the amount you withdrew to pay medical insurance premiums while unemployed
Additionally, avoiding withdrawing is ideal when maintaining the solid retirement foundation you’ve built. Even if you’ve just been making small, incremental contributions to your accounts, this strategy can build a strong financial state for your retirement. This requires that you don’t touch it or steal from yourself!
If you’re worried about emergencies, try splitting your “savings budget” into two buckets: Retirement funds and Emergency Savings. Let’s say you have $200 to save every month. Put $100 of that into an Emergency Savings fund: this fund can help pay for unexpected emergencies such as medical bills, house repairs, car accidents, etc. The other $100 can be distributed into your retirement account. For your retirement savings budget, don’t forget to max out your 401(k) first so you can take advantage of your employer’s match (if you have that option) and then consider other options.
Written by Kayla Johnson
This blog post is from the Author's perspective and doesn't speak for brightpeak financial. Contact brightpeak if you want to know more about brightpeak products, and keep in mind that they are not available in all states and there are some limitations (some exclusions and restrictions may apply).