Virtually all economic growth of the past decade can be attribut to housing and the loans that made expansion possible.  The collapse of these markets unleash a financial tsunami; a wave washing away the homes, savings, and future plans the “boom” had creat.  Millions have lost their livelihoods and retiret.  Millions more are struggling to build a seawall between their American “dream” and financial reality.  They are depleting their savings and running up equity lines to make ends meet.  Even worse: some continue to cash out their retiret to keep critors from their or

Withdrawing money from retiret might seem an easy solution to pressing financial problems.  But removing savings from a tax deferr retiret account can result in a large, unanticipat tax bill.  We have discuss this topic before, yet the extent to which it continues has spurr me to revisit the topic.  In this article, I will discuss some basic tax implications of cashing out a retiret account.  My goal is to minimize r tax burden while protecting r financial future.

Whether r retiret plan is an Individual Retiret Account (IRA), Simplifi Employer Pension (SEP), 401(K) or 403(B), it exists to serve one function: to save for retiret.  Contributions and earnings to these accounts are not subject to income tax until the money is withdrawn.  If, however, funds are withdrawn prior to reaching age 9 ½ these withdrawals will be subject to income tax and an additional “early distribution” penalty (usually 10%) unless a specific exception applies.  Funds withdrawn after reaching age 9 ½ are still subject to income tax but not the penalty.

The tax and penalty can add up quickly.  For example, let’s assume are not yet age 9 ½ and have $1,000 in crit card debt.  cash out a portion of r retiret to pay them off.  Early the next year the retiret trustee sends a 1099R for the $1,000 distribution.  If r family is in the 2% marginal tax bracket, this $1,000 early distribution will cost $3,70 in feral taxes, $1,00 in penalties and $97 in state taxes.  Paying off r crit cards cost a total of $6,22 in taxes (41.%)!  Making matters worse: It is likely that will not have the $6,22 ne to pay the tax bill.  will have to work out a payt plan with the tax authorities, put the balance back on the crit cards, or cash out even more of r retiret.  Every option racks up more interest and/or penalties.

All tax-deferr withdrawals are subject to income tax.  But, as tion earlier, there are a few exceptions to the ten penalty.  Although there are no exceptions specifically for financial hardship, there are several exceptions that may those experiencing money troubles.  Here is a brief list of withdrawals can make without paying the penalty:

There are more to consult r tax professional, financial advisor and attorney prior to cashing out r retiret.  In addition to tax and penalties, r retiret may be worth a fraction of what it was a few short years ago.  Withdrawing funds will lock-in these losses and forego the tax-free, compound earnings that may have been generat if the funds had not been withdrawn.  r retiret may also be protect from r critors, even if file bankruptcy.  On the other hand, the IRS may be to take r retiret if are un to pay the tax on an early distribution.

 

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