Life can be unpredictable. Do you know how you will handle that unpredictability? For example, if you were faced with a sudden, substantial medical bill or your home was damaged in a storm, do you know where the money to pay for those expenses will come from? If you’re financially savvy/smart, you probably have an emergency fund set aside to help with those expenses. However, if you don’t have such money set aside or the costs are more than your emergency fund, you may need to find other financial resources to tap into. While I strongly discourage it and will only suggest it as an absolute last resort, taking an emergency withdrawal from your retirement funds is a potential option. I want to remind you, again, that taking emergency withdrawals from your retirement account is highly discouraged and should only be done under the rarest of circumstances. It’s also important that you at least understand the rules and consequences of taking a hardship withdrawal. First off, you will want to see if your retirement plan even allows hardship withdrawals. Most 401(k)s and IRAs allow for hardship withdrawals, but there may be specific guidelines you will have to follow. You will also need to ensure that the expenses you intend to use the money on qualifies as a “hardship” as defined by the plan rules or custodian. Many plans have a list of such events that automatically qualify (i.e. certain emergency medical procedures, required home improvements, etc.). Be aware that there will be tax consequences to a hardship withdrawal if coming from somewhere that isn’t a Roth IRA. You may even get hit with an early distribution penalty, depending on your age when you make the withdrawal. You will also need to make sure that the withdrawal is only for the amount of the expense and nothing more. Before you make a hardship withdrawal, you need to show that you have no other options as well, which may require opening up your financials to scrutiny. These are the main things you will need to be aware of, but there may be more depending on the retirement plan you want to take money out of and your personal situation. Taking a hardship withdrawal can be a tricky transaction that can open you up to serious penalties if not done correctly. If you are considering a hardship withdrawal, you will want to speak with a certified financial planner both to decide if the move it right for you and also to make sure that you do it correctly should you decide to do it.
There’s a good chance that you have a will, especially if you have assets that you want to share once you have passed on. If you don’t have many assets or few family and friends to share them with, then you can get by with a simple will (i.e. maybe a page or two long saying who gets what). However, if you have young children–or grandchildren–a simple, boilerplate will probably won’t cut it. Furthermore, if you find that your will may end up leaving a large inheritance to a child or young adult, you will want to consider guidelines and limitations on how the money can be used and when it can be used. This is where a trust comes into play. Since there is a whole section of law devoted to trusts (usually combined with wills and estates), I am not going to get into the legal mumbo-jumbo of the different types of trusts and how they all work. In a nutshell, though, a trust is a legal vehicle that allows for the distribution of money or assets, as overseen by a trustee, to a beneficiary. The trustee may have certain guidelines and rules that he or she must follow when distributing the assets within the trust, which are defined by the settlor–the person who is looking to have his or her assets or money distributed. There are multiple types of trusts out there and each have different ways that they are created and can be used. Why am I talking about trusts? Well, if you have children (or grandchildren), particularly ones that are young, a trust can be an effective way to make sure that they don’t blow through any inheritance they receive. For example, you can instruct the trustee to not distribute the assets or money in the fund before the beneficiary reaches a certain age or that is can only be used for certain purposes. This can protect both the assets you place in the trust as well as the beneficiary and prevent the beneficiary from becoming to reliant on an inheritance. Despite the simplistic approach of this blog post, trusts can be complex. Thus, you will need to speak with an attorney, particularly one specializing in estates or trusts, if you decide you want to set one up as they can legally do so and will ensure that it is done properly.
You’re probably aware of the “still working” exception found in certain employer-sponsored retirement plans. These exceptions allow people to delay taking required minimum distributions (RMDs) from your retirement account if you are still working at age 70 1/2. Taking advantage of still working exceptions can extend your retirement savings by allowing you to delay tapping into your nest egg. However, do you know what it means to be “still working?” If you don’t, then you’re in good company, because the IRS doesn’t have a definition either. Don’t worry, though, as that isn’t as scary as it seems. Chances are if you are working part-time–that is, somewhere in the realm of 20 hours a week–then chances are you will be just fine with the still working exception, if you seek to take advantage of it. However, if you are well below that 20 hour threshold, you may want to confer with your plan custodian and discuss any guidelines they may have regarding taking advantage of a still working exception. Remember, the last thing you want to end up doing is getting in trouble for not taking an RMD when you should have. If you have no intentions of retiring or stopping working at age 70 1/2, you may want to see if your retirement plans will allow you to delay RMDs or if they have a still working exception. You should review those exceptions and make sure you understand how they work and what requirements they may have regarding employment and the amount of hours you need to work.