John Watkins

John Watkins

When Is It Okay To Tap My Retirement Account?

Did you know the average American has had at least seven jobs by the time he or she hits the age of 28? Data compiled from the Bureau of Labor Statistics reveals that the average American citizen has held at least 12 jobs over the course of life!

How does that impact your retirement account? Clearly, you are moving it around if you change jobs. However, a large majority of Americans under the age of 35, end up cashing out their401(k) retirement accounts completely, paying the 10% penalty and losing out on all the savings they could have. According to Fidelity statistics, as much as 20% of all Americans regardless of age do this whether it is because of job change or loss or unexpected expenses. The net result is zero savings put away for retirement, which is supposed to be the income you would live off in the future!

Anyone cashing out a retirement account under the age of 59 1/2 years old, is also subject to the high 10% penalty rate for tapping the account early and has to pay income taxes on top of it.

Option 1: Keep It in Your Current Plan

Wha do you do then with your retirement account when you switch jobs? You can leave your 401(k) in your current employer’s retirement plan as long as your balance exceeds $5,000. If it is less, your employer can elect to cash out your account or “force a transfer” to an Individual Retirement Account of their choosing, if you don’t leave instructions for the money.

Option 2: Move it to Your New Employer’s 401(k) Plan

So, in the case you have more than $5,000, you can keep your money in your existing plan or move it to your employer’s 401(k) or roll it over to your own IRA. While retirement plans have lower fees at corporate accounts, they also rake in higher administrative fees. 

Option 3: Move it to an Individual IRA Account

Hence moving your funds to an individual IRA will save you dollars and give you access to the funds. You will lose the benefit of a plan sponsor with the fiduciary liability to oversee your assets. You can overcome this loss by hiring a professional fiduciary to serve the same purpose.

What Happens When I Have An Emergency?

When is it okay though to tap your account? When you have an emergency, shouldyou do it? It is actually best to NOT pull it out of your retirement plan because you face larger fees. If you decide to take out a loan, you have to follow strict guidelines. If you fail to follow the repayment plan for whatever reason, your loan will be considered a distribution immediately and your funds will be subject to the 10-percent penalty and tax hit. If you lose your job or income source, or you have unexpected medical or other expenses while you have an outstanding loan, you only have 60 days to come up with the entire loan balance in order to avoid tax consequences.

If you have an emergency expense for a medical bill, repair or other event, pull the funds from your savings or checking account. Even a credit card can be a better choice especially if you have a 0% interest rate (new cards typically for a period of 1 year), you can do so as long as you know you will pay it off before the deal expires.

The only type of retirement account that you can consider tapping for emergency funds is a Roth IRA because you can withdraw up to the amount of your contributions without any taxes or penalties.

There are also two exceptions to the penalty rule for withdrawals from a traditional IRA account such as the purchase of a first home or to pay for qualified higher education expenses. Discuss this move with a tax advisor first to take into consideration any IRS rules and requirements. Always remember though, despite whatever reason you decide to tap your retirement account, you are not only reducing your savings immediately but you are also missing out on potential returns in the future.

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