Stop Before Withdrawing From Retirement Account
If you need money and have balances in your retirement accounts you may be thinking about making a withdrawal from one of those retirement accounts. The best financial advice you can get is to stop before continuing with that financial transaction because it could be costly. Making a withdrawal from a retirement account before age 59 1/2 may not be in your best interest due to taxes. The second best financial advice is to delay the purchase or find another source of funds besides your retirement accounts.
It’s All About Your Age
To keep your costs down, watch your age.
If you are thinking about making an IRA withdrawal or a 401k withdrawal, your age means everything. The age to be aware of is age 59 ½. If you make withdrawals from retirement accounts before age 59 ½ – you may incur taxes. To avoid paying taxes on your retirement account withdrawals, hold off making any withdrawals until after you reach age 59 ½.
It’s Different With A Roth
Taxes are different with a Roth IRA.
If the retirement account is a Roth IRA, the withdrawal can be tax free. If you are over 59 ½ and the account has been held for 5 years, the withdrawal is tax free. Money invested into a Roth IRA has been previously taxed, it is after tax money.
A Traditional IRA
With a Traditional IRA, even if the withdrawal is made after age 59 ½, you will still have to pay taxes on that withdrawal. Money invested into a Traditional IRA has never been taxed which is why it gets taxed no matter what age you are when you make your withdrawals.
Your 401k Account
The reason a 401k withdrawal before age 59 ½ gets taxed is because a withdrawal before 59 1/2 is considered by the IRS to be an early withdrawal. IRS rules and regulations stipulate that investors pay taxes plus penalties on early withdrawals.
In tough economic times sometimes the easiest sources of money can be the most costly. It is easy to make a withdrawal from your retirement account balances, but it can also be costly.