- October 17, 2018
- Posted by: Michele Crew
- Category: Uncategorized
Many of us have experienced financial struggle. For some, that may mean dipping into an emergency fund to cover that unexpected expense. But, if you’re one of the many Americans without a savings account, you may be thinking about cashing out your retirement savings.
Before you run desperately to your nest egg, think about how you could be affected. With a hefty tax penalty, you could be giving up more than you think.
Cashing out on your retirement fund early will not only hurt you in the long run, but you could be giving a great percentage to the government, too. An early withdrawal is considered any deduction before the age of 59 ½. Unless you qualify for a hardship distribution, you could be looking at a 10 percent tax penalty on the amount you wish to take out. For example, if you have a balance of $10,000 and you deduct $8,000, you will be looking at a tax penalty of $800. This leaves you with only $7,200 of your initial withdrawal.
Some retirement plans may offer a loan option which allows you to borrow money from the account. However, the money must be paid back. If you choose to use this option, you may not face a tax penalty as long as the loan meets the repayment schedule and rules.
In some cases, you may qualify for a hardship distribution if you’re in immediate need for financial assistance. In this case, your employer would determine if you are eligible for a hardship withdrawal by gathering information about the circumstances. The need for cash must be unforeseeable and involuntary, meaning a new television may not qualify for a distribution. For six months after the distribution, you cannot make any elective deferrals to your retirement plan. The withdrawal cannot exceed the amount needed to cover the financial hardship.
If you think you qualify for a hardship distribution, view further details here.
In some circumstances, an early distribution may be the only way to cover a financial need after you have exhausted all other avenues for cash. Before you make the decision, always do research to be sure it’s the right decision for you.