How They Work
401k’s and Traditional IRA’s were created to provide a tax benefit for retirement savings.
Contribute to the accounts and your taxable income is reduced by the amount of your contributions. The account grows tax deferred; then income taxes are paid upon distribution.
If you withdraw from these accounts prior to age 59 ½, you’ll pay a penalty to the IRS and possibly to your state taxing authority for taking the withdrawal (there are some exceptions).
For Purposes Other Than Retirement
401k’s and IRA’s were meant to be retirement vehicles. But on occasion, people see a need to use the accounts for the down payment on a home purchase, or as a means to pay-off debt during tough times.
We encourage those folks to understand the tax implications before making this move...as the following effects can be devastating:
- Withdrawn amounts are taxed at your highest marginal tax brackets (can mean 35-40% between IRS & State!) Click here for more info on tax brackets
- Early withdrawals can face over 10% additional penalties (bringing the total tax to possibly over 50%!)
- You forgo potential earnings on withdrawn funds
- Withdrawals can’t be re-deposited
Rather than making a withdrawal, consider the following:
- Put less down on your home purchase. There are great loan programs for those with < 20% down.
- Bank installment loan - Keep your retirement accounts in place.
- 401k loan - Just be careful as loans will be considered withdrawals if you lose your job, or change employers (if not paid back in full within 60 days).
- Consider alternative debt repayment plans. Reduce other expenses and pay-off credit cards with extra payments. The interest may end up being less than the tax penalty on retirement account withdrawals.
In the end, every situation is unique. Contact us if you’d like to review your specifics...we’re happy to help!