It can be tempting to look at your nest egg and see an untapped source of money, particularly if your nest egg is sizeable and you are nearing retirement. For example, maybe you found your dream retirement home and need money for a down payment. You may look to your IRA for a short-term loan to meet those money requirements. I’m here to tell you that that is a bad idea and to discourage you not to do so. The biggest reason being that you don’t want to tap into your IRA monies until you actually retire and, even then, you will want to have a plan for doing so. You’ve worked hard to save up for your post-work life and you want to make sure that money goes towards your retirement goals (of course, if purchasing a retirement home is part of your plan, then that’s a different discussion). The other risk of viewing your IRA as a loan source is the risk of making a mistake when taking out money. Keep in mind that there are two routes you can go when taking money out of your IRA before reaching retirement age. First off, you can take a distribution, pay the taxes and penalties, and then not have to worry about what you do with the money. The other option is to take out the money and do a 60 day rollover, which will involve paying back the money within that 60 day window. There’s a lot of risk involved with that. I repeat, there is a lot of risk involved with doing this. Mainly, if you take out the money, is there any guarantee that you will recoup it within that 60 day window? Chances are, you are going to be making a large purchase if you need a loan (probably talking thousands of dollars), so what are the chances that you will make that money back in two months? If you are certain that you can do that, then maybe you can consider it. However, if you aren’t so sure that you can complete such a transaction in that timeframe, stay away from this idea. That can lead to a lot of problems if you aren’t able to put the money back within those 60-days. Hint: Don’t open yourself up to the IRS taking more of your money through penalties! If you are in need of money, you should consider other types of loans or selling off other assets before even considering your IRA as a loan source. You may even want to really think about whether you even need to make the purchase at that time and whether you can put it off until you actually have the funds and leave your retirement money alone.
Thinking about taking an early distribution from your retirement plan and believe you can do so without getting hit with a penalty? You should be very, very careful in doing so. Yes, there are times when taking an early distribution is appropriate and you can avoid an early distribution penalty, but such situations are often few and far between. Aside from avoiding early distributions at all costs, you should really speak with a certified financial planner or retirement expert as part of the consideration process if you are fairly serious about doing so. While there are a number of ways you can take an early distribution without getting hit with a dreaded 10% penalty, it is also pretty easy to end up afoul of those exceptions and end up paying a hefty sum. The rules can be complex and if you don’t have a deep knowledge of how they work then you could be setting yourself up for trouble. This is why you need to speak with a financial professional who knows the rules and can provide honest and straight-forward feedback as well as make sure that you follow the proper rules should you find yourself in a situation in which you can take a distribution without the penalty hit. Those penalties can be somewhat hefty, especially if your distribution is a large chunk of money. Obviously you want to avoid the early distribution if possible, but if you do need to make one, be sure that you do so with all the knowledge and understanding possible.
When it comes to saving for retirement, IRAs and 401(k)s get lots of love. They’re the two accounts that get talked about the most and, as a result, tend to be the most common accounts that people use when saving for retirement. While they are a great way to save for the future, they shouldn’t be the only accounts used when saving for retirement. Just like when it comes to investing, you should consider diversifying where you save your money for retirement. Yes, you should use accounts such as IRAs and 401(k)s to do so, but you should also save your money in non-retirement, taxable accounts that allow you access to your money before you reach the required age for IRA and 401(k) distributions (usually age 59 1/2). Having such accounts will allow you the ability to reach money should you need it, instead of having to take early distributions, which can often lead to IRS penalties. While you should only take money out of such accounts as an emergency, it can be comforting and practical to have a buffer to allow you access to emergency funds. If you have questions regarding non-retirement, taxable accounts, you should speak with a certified financial planner who can provide tips and suggestions regarding what type of accounts to set up and how much of your retirement funds you should save into such accounts.
If you are considering taking money out of your Roth IRA before reaching age 59½, you will need to understand the Roth IRA distribution rules. The rules require that all contributions come out first and are tax and penalty free. Next comes conversion amounts. Contributions on distributed on a “first in, first out” basis and they are income tax free. However, any conversion taken out before reaching the 5-year holding period gets hit with a 10% early distribution penalty, barring any other exceptions. Once a conversion has been held for 5 years, it is not subject to that 10% early distribution fee. After you have taken out the basis, which the Roth IRA owner always has access to, the Roth IRA then distributes the earnings, which are always taxable and always subject to the 10% penalty if taking the distribution before age 59½. If you are considering taking a distribution from your Roth IRA before age 59½, you should speak with a certified financial planner or retirement expert to make sure you are doing so in a manner that limits penalties and will not hurt your savings.
Are you getting near retirement age and considering making a withdrawal from your IRA, but don’t want to get hit with a penalty if you do? There are multiple ways to withdrawal money from your IRA. However, most of these methods cannot be done until you have reached age 59½. Such methods for withdrawals without penalties include: withdrawal of excess contributions, required minimum distributions (RMDs), qualified higher education expenses, and first-time home purchases, just to name a few. If you are considering taking money out of your IRA, you should talk with a certified financial planner to make sure it is the right move and to confirm that you are doing it the correct way.