Early Withdrawal From a Retirement Account
- Withhold 30 percent to account for taxes and penalties.30 % rouge image by Kho from Fotolia.com
Call the custodian and ask how to remove money early from the plan. They may allow telephone redemptions, but many require paperwork. Experts advise people withdrawing funds early to have the custodian withhold 30 percent to account for taxes and IRS penalties. You may not receive the money for several days if it is invested in variable instruments such as stocks or bonds, or if funds must be mailed to you. - Consider compounding interest before removing money.man thinking image by forca from Fotolia.com
The 10-percent tax penalty may not be as large a bite as the potential compounding interest loss. If a 25-year-old removes $10,000 to purchase a vehicle, he'll net only $7,000 after 20-percent withholding and a 10-percent penalty. If that money had stayed invested until age 65 at an 8-percent return, it would have grown with compounding interest to $217,245!
Become familiar with the list of exceptions to avoid penalties for early withdrawal. Funds may charge additional fees to move money out of investments or expedite the transaction. After all the fees and penalties, it may be less expensive to take money from other accounts or to borrow the funds. - Money may be removed for some hardship, education and first-home exceptions.flying money image by Dwight Davis from Fotolia.com
Although the IRS allows hardship withdrawals from 401k plans, employers are not required to make them available. Check with your employer for their specific rules. No 10-percent IRS penalty is assessed if you qualify as being totally disabled, owe 7.5 percent of your adjusted gross income or more in medical debt, are required by a court to pay the money to a spouse or child, are separated from the service at or after age 55, or if you've separated from the service and have set up substantially equal periodic payments using specific IRS rules. In an IRA, you may use the money for qualifying education expenses, and up to $10,000 for a first home purchase. If custodians have fees for exit, these may be waived for a disability. Check with your plan for a list of their early withdrawal exceptions. - You'll receive a 1099-R showing your distribution.tax forms image by Chad McDermott from Fotolia.com
The account custodian will send you a 1099-R the following January showing the withdrawal and the money withheld for taxes. This is used to complete your tax return. If you qualified for an exception, it will be noted on your 1099-R by the custodian. A Form 5329--Additional Taxes on Qualified Plans (including IRAs) and Other Tax Qualified Accounts--usually should be completed. - Funds may withhold fees for transferring money.money makes money image by Andrey Andreev from Fotolia.com
Custodians may charge fees for withdrawal. There may also be fees to expedite funds or to wire money to your bank account. The investment may also be subject to early withdrawal or transaction fees. Ask your custodian about these fees ahead of time to avoid surprises when removing funds.
