Most people are aware that if you withdraw money from a traditional, tax-deductible IRA before age 59½, you are subject not only to ordinary income taxes, but a 10% federal tax penalty. That’s designed to keep your savings growing over the years.
But these days, many desperate people are taking money out of retirement accounts early. Many are unaware that this is a very costly move.
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Here are some mistakes you should never make!
1. The Rollover Rule
A rollover occurs when you move an account from one custodian to another, but instead of having the account transferred directly from custodian to custodian, you take the money in the form of a check, and then open a new account. That’s considered a rollover.
You must move the money to a new custodian within 60 days — or it will be treated as a withdrawal, and you’ll pay applicable taxes and a penalty, if you’re under age 59½. And you are allowed only one rollover per year. Do a second one, and you’ll pay those taxes and penalties.
Solution: Have the money transferred directly from custodian to custodian, without taking a check. You can do unlimited account transfers in a year, but only one rollover.
2. Withdraw from IRA for Education
If you will need to withdraw for education, move the 401(k) funds to your IRA (if your plan allows, typically if you’ve lost your job) and withdraw from the IRA to pay education bills penalty-free. The education exception applies only to distributions from IRAs, not from company plans.
If you really need the money, and if your company plan allows, you can “borrow” from your 40l(k). But if you lose your job and haven’t returned the money, it will count as a withdrawal.
3. Set Aside Money for Taxes on Withdrawals
Whether you’re taking cash out early, or taking the annual mandatory withdrawals required in the year you reach age 70½, set aside the cash to pay the taxes when your next tax return is due. Otherwise you’ll get caught in a vicious cycle, needing to withdraw more to pay taxes next year.
For additional financial tip make sure to read Daily Finance. Don’t forget to read How To Handle Financial Stress and Forbes Explains How They Created “The Hip Hop Millionaires List” [VIDEO]