Have you ever thought about tapping into your retirement savings?
If so, you are not alone.
You need to have a good money management strategy to tap into your retirement savings. It's crucial because if you are under 59 ½ years old, the IRS could slap you with a 10% early withdrawal tax penalty. This is costly because it's in addition to your regular income.
There are right and wrong ways to do everything. The IRS (Internal Revenue Service) imposes an additional tax to discourage early withdrawals. It's called the penalty tax, and you could pay it if you don't their disbursement rules. After all, the purpose of your retirement savings is to save money so you can have the type of retirement you desire. However, there may be times when you need your retirement savings before you retire.
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If this is one of them, then naturally you want to tap into your retirement savings the right way to avoid tax consequences, especially if you are younger than 59 ½ years old.
You have several options when you want to tap into retirement saving. Below are a few money management tips for doing it the right way.
1. Someone dies. It is one of the main reasons many people want to gain access to retirement savings. If your loved one dies and still has funds in his or her qualified plan or individual retirement account (IRA), the beneficiary may claim the money. Generally, funds are distributed to the spouse, however non-spouse beneficiaries may also be to make a claim. Refer to guidelines established by the IRS or talk to your financial advisor because distributions to a non-spouse beneficiary can be complicated.
2. Become permanently disabled. Owners of individual retirement accounts, qualified pension, profit sharing, 401(K), 403(b), and SIMPLE 401(k) plans can tap into their retirement savings without paying a penalty if they suffer a permanent disability. If you own a qualified plan and suffer a permanent disability, ask your human resource office to help you apply for benefits. Individual retirement account owners should contact the financial institution or brokerage that manages their account to apply for benefits.
3. Home Buyers. Do you want to buy, build, or remodel your home? If so, then tapping into your IRA might be the solution. You, and your spouse, if you are married can receive up to $10,000.00 to buy, build or rebuild a home. That's $20,000 total. These funds can be used to purchase a primary residence for you, your spouse, your children and even a grandchild or parent. As long as you use the funds within 120 days, you don't have to worry about paying the 10% penalty.
4. Paying for college? College is expensive. One way you can offset the cost is to use a portion of your retirement savings.Your IRA is the only account you can tap into without penalty. Funds can be used to pay tuition, fees, books, supplies, and equipment at an eligible higher education institution or trade school for yourself, your spouse, children or grandchildren. Room and board may also be included if the student is enrolled at least half time at an eligible institution. Before starting the process, make sure the college or university is eligible.
5.No Income due to job loss. Did you quit your job, get fired or retire? If so, those are three great reasons to want to tap into your retirement savings. You will avoid the 10% tax penalty if you over 55 years old. Public safety employees can be age 50 to access their retirement savings. Only qualified pension, profit sharing, 403(b), 401(k), and SIMPLE 401(k) plans qualify to receive the separation from service distribution. Self-employed individuals can not withdraw money from their retirement savings plans using this distribution method.
The above is only a summary of ways that might exempt you from the 10 percent tax penalty that the IRS imposes on certain early distributions, however there are more. The exemptions depend on whether a distribution is taken from an IRA or qualified employer-sponsored plan. Consult your tax professional or visit the IRS.gov for more detail.
Good money management is more than managing your budget. It's also about ensuring that you have the kind of lifestyle you want when you retire. When you minimize taxes, especially excessive ones such as a penalty tax you maximize your retirement savings. A good money management plan can help you reach your financial goals faster. And that's why 10 million use Mint.com and you should too.
Written by Princess Clark.