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When is it OK to Take Money From Your Retirement Plan or IRA?

June 27, 2020

When is it OK to Take Money From Your Retirement Plan or IRA?

Maybe you’ve heard from early on, save, save, save.

Maybe you’ve also heard, contribute to an IRA! And then contribute, contribute, contribute!

And with that have you also been told not to even think about pulling from that retirement account until you actually RETIRE? (I was!)

As with many of the topics that fall under the umbrella of “financial planning”, this one, especially during a global pandemic and economic slow down, can be complicated and the lines get blurry. So this month, we’ll look at this a little closer to shed some light on what to consider with your retirement assets if you’ve been financially affected by the impacts of COVID 19 (or other economic challenges).

One of my primary jobs as a financial planner is of course, helping my clients to save and build their wealth.

But what happens when job loss hits?

Or costly health events?

Or as a small business owner, you need to temporarily (or permanently) close your doors?

There are a number of reasons why pulling money out of an IRA early could make sense.

But first, the basics: There are two types of retirement accounts, ROTH’s and traditional (or tax deferred). For simplicity sake, we’ll focus our time today on the tax-deferred because that tends to be the higher balance for most, and the one with the greater tax consequence.

For those traditional tax deferred IRA’s and 401(k)’s, under most situations, unless you are 59 ½, you’ll pay a 10% penalty for removing those funds early*. That’s 10% PLUS what your tax bill would be! (Add that to taxes and the amount that gets added to your withdrawal can easily become a whopping 30%!).

This reason alone can be a big deterrent to drawing early.

But what if you can’t pay your bills today? If you’ve exhausted other avenues like unemployment, loan forbearances, and HELOCS to name a few and you’ve got an IRA that’s staring you in the face, how do you know if pulling from that is the right thing to do?

Here are some questions you can ask yourself as you try to decide:

  1. Are the bills I plan to use this money for necessary? (a want or a need?)
  2. If I pull this money today, how will that affect my longer term financial situation?
  3. How will I need to adjust my future saving to catch back up?
  4. And is that realistic?
  5. If this is a retirement plan through my employer, can this withdrawal be done as a loan rather than a distribution?
  6. What will the tax consequences be? Are there any exceptions that would allow me to not have to pay the extra 10% penalty? The CARES Act, passed this Spring to aid individuals affected by COVID 19 does temporarily eliminate this penalty for many. Read here for additional details.

Since the amount we can put INTO these accounts is limited every year, and the amount we can typically save every year to begin with is likely to be limited too, it’s important to consider the consequences closely before making this decision.But it may beat the alternatives like building up a bunch of credit card debt that will be costly in its own right.

And for ROTHs, the rules are different. In general, you can withdrawal your ROTH IRA contributions (contributions only!) without a tax penalty**.

At LOTUS, we can’t tend to the sick or eradicate the virus but we can help reduce the stress and anxiety of the people around us by addressing the question of “Am I going to be OK?”.

As a team we have committed to be available for anyone that’s in need of an advisor right now, client on not. If you or someone you know is grappling with this question, we are offering free Discovery EXPERIENCES to anyone who might need a little help right now.

THE GIFT of this meeting is to help you explore your fears and values, clarify your goals and your current situation. We then share, in writing, how we would approach improving each area of your financial life.

Our intention is that every person who has a Discovery EXPERIENCE with us, walks away with a better understanding of their financial situation and a roadmap of how to begin to strengthen their plan…no strings attached.

If this is help you would like to get, click here to connect and we’ll reach out soon.

*Exceptions to early IRA Distributions:

**Roth IRA Distributions:

~ Wendi