hen an emergency arises, it can be tempting to use some of the assets you’ve built up in your retirement plan, but before you do so, ensure that you’re aware of some of the consequences. Below we outline just a few:
Traditional IRAs: All withdrawals of tax-deductible contributions and all earnings are taxed as ordinary income. Generally, any withdrawals made before you reach 59½ years old are also subject to a 10% early-withdrawal penalty.
Roth IRAs: Because contributions and conversion amounts have already been taxed as ordinary income, no additional tax or penalty is due. However, any withdrawals of earnings made before you reach 59½ years old may be subject to a 10% early-withdrawal penalty unless an exception applies. Withdrawals of earnings may be tax-free if five years have passed since your first contribution or conversion, and if the withdrawal is made for a qualifying reason.
Education IRAs: Withdrawals generally are made for qualifying educational expenses, and there are no provisions for hardship. So education IRAs generally cannot be tapped for emergencies without taxes or penalties.
401(k) Plans: After-tax contributions may be withdrawn for any reason, but earnings on these amounts are taxable and generally subject to a 10% penalty if you are younger than 59½ years old. You may be able to withdraw pretax contributions early if you demonstrate financial hardship. This could include forestalling eviction or foreclosure on your primary residence; paying college tuition for yourself or your dependents; paying medical expenses not covered by your insurance; or purchasing a home. The distribution is subject to federal tax withholding and is taxable in the year of the withdrawal. Plus, if you’re younger than 59½ years old, the withdrawal is generally subject to a 10% penalty.
The tax and legal information in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations and is not exhaustive. Investors should consult their legal or tax counsel for advice and information concerning their particular circumstances.