There are many people who turn to retirement accounts for extra cash. Most financiers would try to persuade their clients to find another resource. For many people, tapping into their retirement brings relief now but they pay for it somehow later on. How can retirement plans hurt your finances? There are 5 penalties you can avoid if you steer clear of making the decisions that cause them.
Money taken out of your IRA before the age of 59.5 gets penalized twice. There is a 10% penalty for the early withdrawal and the amount taken becomes part of your gross annual income come tax time. If the money, (up to $10,000) is used to pay for college or to purchase a first home there will be no penalty. Large medical expenses are another use that would deflect penalties if the expense is more than 10% of your annual income. Try to find other solutions.
Roth IRA owners have an opportunity to withdraw early as long as they have owned the account for at least 5 years. Only withdraw money that was initially contributed and leave earnings alone.
Early withdrawal age is 59.5 as well. There are no penalties if the person leaves their job by 55 or age 50 for public safety workers. The 401K does allow withdrawals once you turn 55 but the money must be paid back like a loan. If you leave the job before paying off the loan in full, the balance will then be due in full. If you don’t have the money to pay it back, the loan becomes an early withdrawal with penalties attached. Pay attention to the repayment details if you do choose to withdraw early.
Penalty for failing to withdraw by 70.5 years of age
How about a 50% tax for not withdrawing from your 401K or IRA? That is what happens if you are 70.5 and are not pulling money from your retirement accounts properly. There are ways to avoid the penalty. The stipulations are complicated. It is advised that you discuss your options with your financial advisor or CPA before a delay is subject to penalties.
Social Security penalties
Early withdrawal for Social Security occurs when you sign up for your benefits before age 66 if born before 1960 or age 67 if born during 1960 or after. The penalty for signing up before the proper SS benefit age is a lifetime of smaller monthly payments. If you can wait, you should.
Late enrollment to Medicare penalties
You delay signing up during the 7 month window around your 65th birthday to increase payments. There are also penalties for signing up late. It would be in the best interest of any qualified person working or not to discuss the best choice for their personal situation.
It is a serious decision to tap into a retirement fund. Whenever possible, the better choice would be to use a different method to obtain money. Could you get a home equity loan? Do you only need a small amount covered by a personal loan or a new credit card? Is there a way to minimize what you need to borrow? Check with family and friends for possible loans or advice. Never leave a stone unturned. It is important to understand money options and potential consequences before decisions are finalized.