Has the recession hit you hard? Are you considering tapping into your retirement? Be aware of the rules before you make that decision.
Valerie RumboughIf you are under 59-1/2, you will have to pay both income tax and a 10 percent early withdrawal penalty on the amount withdrawn. There are exceptions, however, to paying the 10 percent penalty.
For IRAs, you can be exempt if you use the amount to pay medical insurance premiums while you are unemployed, qualified higher education expenses, or to buy your first home. For other types of retirement plans, exceptions include either leaving your job at age 55 or older, or electing to receive substantially equal periodic payments after you leave your job. Remember, though, that the exception does not include regular income tax on the amount withdrawn.
Sometimes you may be able to tap into your retirement through a hardship distribution. Be aware, though. The rules are very strict, and your particular retirement plan may not allow you to do this. This is because the IRS knows that you will need these funds later, and wants to make sure you have exhausted every other avenue before you take funds from this source.
If you still believe this is something you really need to consider, contact your plan administrator and find out the rules before making that decision. To read more on this, go to www.irs.gov, and look at Publication 590 for IRAs and/or Publication 575 for pension and other plans.
Rumbough, CPA, CFP, is chief operations officer with the Baptist Foundation of South Carolina. Contact her at (800) 723-7242. In accordance with IRS Circular 230, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.