When Does it Make Sense to Take Money From Retirement?
If you have managed to save money in a retirement account for several years, it could give you a large source of cash to use during your retirement years. In some cases, you may be tempted to tap into this money before you reach retirement age. While this is never an ideal option, some situations make more sense than others to tap your funds.
Other People Are Reading
-
Avoiding Penalties
-
When you can take money out of your retirement account and avoid the penalties, it may make sense to do so. If you take money out of a qualified retirement plan before you reach retirement age, you typically have to pay 10 percent early distribution penalty. In some cases, you can get out of paying that penalty. For example, if you withdraw money from an IRA for education costs or to pay for the down payment on your first house, you can avoid the penalty.
Borrowing the Money
-
Another time that accessing your retirement funds early can make sense is when you are eligible to borrow them through a loan. If you have a 401k plan available through your employer, you may have the option to borrow money against your account balance. These loans allow you to borrow up to 50 percent of the balance and then repay them over time. When you use a 401k loan, you do not have to pay taxes on the money and you do not have to pay a penalty.
-
Desperate Financial Need
-
Before you tap into your retirement funds, you should make sure that you have a significant financial need that cannot be matched in any other way. Getting money out of your retirement could set your savings back many years if you do not pay it back. If you can get access to the money in some other way, it may be to your advantage to do so. This way, you do not have to risk missing out on your retirement.
When to Avoid
-
If you are considering tapping your retirement money to pay off debt, you should think again. If you are in serious debt, you may want to consider bankruptcy instead. With a Chapter 7 bankruptcy, you can eliminate most of your unsecured debt like credit cards and medical bills. During this process, you can keep all of the money in your retirement account. This means that you can get rid of the debt and keep the retirement money safe.
-
