Need Cash? Is early withdrawal from a retirement plan right for you?
Have you been financially impacted by a cancer diagnosis? Need access to money to pay your medical bills or daily living expenses? Withdrawing money from your retirement plans may be an option for you. However, it is important to understand the tax implications of doing that.
Fortunately, the IRS understands that you may need to dip into your retirement savings a little earlier than expected. And, unlike most of the tax code, this is pretty easy to understand.
Normally, if you withdraw money from a 401k or IRA plan before reaching age 59.5, you would be subject to an “early withdrawal tax” of 10%, above and beyond the normal income tax owed on the withdrawal. However, here are three exceptions to that rule, which can really make a difference:
|401K Plans||IRA, SEP IRA, SIMPLE IRA, & SARSEP Plans|
|If the participant/IRA owner is totally and permanently disabled.||No early withdrawal tax||No early withdrawal tax|
|If your amount of unreimbursed medical expenses is greater than 10% of your Adjusted Gross Income.||No early withdrawal tax||No early withdrawal tax|
|If you are using your withdrawal to pay for health insurance premiums while unemployed.||10% early withdrawal tax applies||No early withdrawal tax|
There are close to 15 more exceptions to the Early Withdrawal Tax. It is also important to know that with ROTH IRAs, you can always withdraw the money you’ve contributed (not the interest earned) tax free and penalty free.
When considering your financial situation as you face a cancer, remember to count every dollar. There could be money out there you thought you could not touch!