Tuesday, April 26, 2011, AM | Leave Comment
The unemployment rate is still very high so is underemployment. In some companies, the layoff is still going on. On the same token, some companies have begun to hire. Hopefully, you still have a job as more than 90% of Americans do. However, if you have been recently laid off, you might have a severance package and a few months’ worth of living expenses set aside.
Sooner or later your unemployment benefits and the living expenses that you had set aside will get exhausted. You will then be tempted to withdraw from your retirement accounts, namely IRA and/or 401(k). Luckily so far, an overwhelming majority of Americans are not dipping into those accounts to cover expenses just yet.
But some Americans say in a variety of surveys they have withdrawn retirement assets prematurely to pay for near-term financial obligations, including credit card debt and mortgage payments. Many more withdrew money early from their retirement because of a recent job loss.
Taking a distribution from a retirement account, before its time, is one of the least tax-efficient places from which to get the money. The distribution becomes a part of your income and is, then, subject to tax at ordinary rates, including state income taxes in most cases, plus a 10% penalty if you are under 59 1/2.
Consensus of the experts
Financial experts suggests that retirement accounts should be viewed as funds of last resort. Look for money in just about any place other than an IRA or 401(k).
- Examine your expenses thoroughly.
- Search for ways to trim fat.
- Borrow money from other sources, including your life insurance plan.
- Withdraw from a taxable account.
- Consider selling assets that produce capital gain instead of ordinary income.
If you must withdraw…
If you must take a distribution from your retirement account – IRA or 401(k) – consider the following tips from the experts with regard to withdrawing money prematurely – before age 591/2.
You can avoid paying ordinary income taxes and the 10% penalty by giving yourself a loan from a traditional IRA provided you reinvest that money within 60 days in the same or another traditional IRA.
You still have to pay the ordinary income tax due, but you can at least take a penalty-free distribution to pay for:
Substantially Equal Periodic Payment (SEPP) / 72(t) Payments
According to Appleby Retirement Dictionary, you can also avoid the 10% penalty tax if you do the following:
- Take a series of distributions from a qualified plan – 403(b) arrangement, or IRA.
- These distributions must be made in equal installment payments.
- They must be over the life expectancy of the retirement account owner or the joint life expectancies of the account owner and any beneficiary.
If you are still employed and you need money, consider taking a loan from your 401(k). The loan proceeds are not taxable, but they need to be repaid as ordinary loan.
If for any reason, your job is terminated, the outstanding loan, if any, must be repaid immediately. Otherwise, that amount is treated as ordinary distribution.
Hardship distributions from 401(k)s
Under certain circumstances, you might be eligible to get a hardship distribution from your 401(k). According to IRS, if a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship.
For a distribution from a 401(k) plan to be on account of hardship, it must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.
Those expenses, deemed to be immediate and heavy, include
- Costs relating to the purchase of a principal residence
- Certain expenses for the repair of damage to the employee’s principal residence
- Payments necessary to prevent eviction from, or foreclosure on, a principal residence
- Certain medical expenses
- Tuition and related educational fees and expenses
- Burial or funeral expenses
In a Nutshell
There are definite ways IRS has bestowed upon us to take advantage of to help us ease in our financial pain. It’s just that some taxpayers are not aware that the windows of opportunities are wide open. However, in some cases, they are shut immediately.
Granted the law provides some openings, but many people are suffering. They are scared, and feel helpless. Big Corporations have done everything they can to short change the workers.
The big insult to the misery of the populace is to be fired for reasons that have nothing to do with the workers’ performance. The law gives taxpayers some protection for their retirement accounts.
However, there are people who don’t even have IRA or 401(k) accounts. They are so overburdened by the everyday expenses in their lives, they simply cannot afford it.Facebook.com/doable.finance