All the way back in September of 2008 I wrote a post titled, “Leave your Retirement Accounts Alone.” The Post was even mentioned in the Carnival of Personal Finance and I think either WSJ or MSN. Well it looks like no one listened (it may be because back then I had about 4 constant readers). The Wall Street Journal has prepared yet another article about people invading their retirement accounts appropriately titled, “More People Tap Retirement Accounts.”
The Statistics of Invading Retirement Accounts
Lets make it clear, it shouldn’t be referred to as tapping…it is invading. You are taking from another (your future self) for the benefit of your current self. The Author, Mr. Dale, provides us with great statistics of those invading retirement accounts:
The number of companies reporting early withdrawals for hardship from 401(k) and 403(b) plans (the nonprofit version of 401(k)s) rose to 44% last month from 15% in October 2008, according to a recent Watson Wyatt study that polled executives at 141 U.S.-based companies using an online questionnaire.
I am not completely heartless (despite the wife calling me, an emotional wasteland) there are cases where it is necessary, but I really feel that most of the time it is a temporary band aid to a bad situation.
An example comes from a new author at my favorite blog, Gather Little by Little. The Post, once again appropriately titled, “I Cashed out my SIMPLE IRA” was written by Stew (not the normal blogger, GLBL). You will see my comments through out the many comments, and they are not as faith based as 98% of the other commenters wishing the author good luck.
Stew, is in a rough situation where he may need the money one day to meet budget constraints. The amount was $1,800 so lets chop of a 25% penalty (oh by the way before he made his moves he didn’t even fully understand the penalty he was incurring!) we will call it $450 cause I don’t feel like getting out the calculator; on top of the $450 he will owe another $360 or so in taxes if his effective tax rate is 20%. So after all said is done he will get a check for about $1,100 or so. When this covers this month’s budget…what will happen next month?
I get things happen, but to do it, “in case he has an emergency” just irks me a bit, but in the end Stew is a really nice guy so I am pulling for him and will continue to read his posts on Gather Little by Little.
How to Avoid the Penalty Associated with Invading a Retirement Account
As discussed in my previous post, there are different rules with 401(k)s and IRAs – the two most common retirement accounts. Mr. Dale gives us a great explanation of what IRAs distributions can be used for to avoid the 10% penalty (25% penalty in SIMPLE IRAs):
For IRAs, the taxpayer may be able to avoid a penalty (but not tax) if he or she uses the money for one of several reasons, including:
- To buy a home (if qualified as a first-time homebuyer under IRS rules).
- To pay for higher education for the immediate family.
- To pay for unreimbursed medical expenses over 7.5% of adjusted gross income.
- To pay for health insurance if the taxpayer has been unemployed for a certain period.
Mr. Dale’s explanation of the 401(k) hardship withdrawals is miserable at best, but luckily the IRS provides us some good stuff:
Certain expenses are deemed to be immediate and heavy, including:
- Certain medical expenses;
- Costs relating to the purchase of a principal residence;
- Tuition and related educational fees and expenses;
- Payments necessary to prevent eviction from, or foreclosure on, a principal residence;
- Burial or funeral expenses; and
- Certain expenses for the repair of damage to the employee’s principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution.
The above list is not exhaustive so check with your legal, HR or financial, professional for more information. Similarly, check with your plan administrator on the how.
In the end like I stated last time,
Before I get angry comments/emails being I took a strong stance here, and there are obviously situations that raiding a qualified account must be done, but it should be done with great caution and not because you need to hold on to your 2 luxury automobiles and McMansion.
Yup, I just quoted myself!
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