![]() ![]() You’re in the military and are called into active duty.You had a child or adopted a child during the year (up to $5,000 is exempt for each account).You use the money to pay for medical expenses (as long as those expenses add up to more than 10% of your gross income).While you still have to pay taxes on any money taken out of a 401(k) or IRA before a certain age, there are some situations that let you get around the 10% early withdrawal penalty for retirement funds. You already paid taxes on the money you’re putting in there, so why would you want to pay more by taking your money out too soon? You should take full advantage of a Roth IRA-and the best way to do that is to leave it alone until you retire.Įxceptions to the Early Withdrawal Penalty Otherwise, you must pay the 10% early withdrawal fee, plus any taxes.īut the whole point of investing in a Roth IRA is that you won’t have to pay taxes when you withdraw the money in retirement. But if you want to take out any earnings (aka any growth from compound interest), you have to be at least 59 ½ and the Roth IRA itself has to be at least five years old. Since a Roth IRA uses after-tax dollars but grows tax-free (one of the reasons why we love it so much), you’re able to pull out any of your contributions, regardless of your age, without penalties or taxes. But even if taking money out of your IRA seems like the easier option now, you’re going to regret it later. There are also some exceptions to the early withdrawal penalty for traditional IRAs. Pay off debt fast and save more money with Financial Peace University. There’s no automatic withholding like there is with a 401(k), but you still have to pay federal and state income tax on the amount you take out. Whether you pronounce it eye-ruh or you sound out each letter, taking money out of a traditional IRA before you’re 59 ½ results in a 10% penalty. But if you’re thinking about taking money out of your 401(k) to cover an expense or pay off debt, ask yourself this: Do I really want to borrow money at 30% interest? Of course not! And that’s basically what you’re doing when you dip into your 401(k) before retirement. Now, there are some exceptions to paying penalties on early 401(k) withdrawals (which we’ll dive into in a minute). So, if you took $20,000 from your 401(k) and that puts you in the 22% tax bracket, you may only get about $12,000–13,000 (depending on state income tax) when all is said and done. ![]() And if you take out a significant amount, it could bump you into a higher tax bracket. You also have to pay taxes on whatever you take out, but the IRS usually withholds 20% automatically. Withdrawing money from a 401(k) early comes with a 10% penalty. We repeat: 60 days! Otherwise, the money is considered to be cashed out, and the government will take its cut.Įxactly how much will you have to pay in early withdrawal penalties and taxes? Well, that depends on the type of retirement account you took money from: a 401(k), traditional IRA or Roth IRA. Here’s the deal: Any money you take out of a retirement account before you’re 59 ½ years old must be transferred to another retirement account within 60 days (this is called a nontaxable rollover). But the key word here is retire. And tapping into those funds before it’s time to actually retire comes at a cost. Retirement investments like a 401(k) or an IRA (Individual Retirement Account) are great tools to build wealth and retire the way you want. Rules and Penalties for Early Retirement Withdrawal When you do the math, you’ll see that you’re better off leaving your retirement investments alone and finding other ways to get rid of your debt. The only time you should even consider taking money out of your retirement accounts early is to avoid a bankruptcy or foreclosure. Not only will you get hit with outrageous early withdrawal penalties and have to pay taxes on anything you take out, but you’re also stealing from your future self! ![]() No, you shouldn’t pull money out of your 401(k) or IRA-even to pay off debt. Should I Withdraw From My Retirement to Pay off Debt? ![]()
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