With Christmas quickly approaching, I know some of you have seriously considered taking a distribution or loan from your retirement account. The only positive aspect to either option is the money you receive. There is a difference between taking a withdrawal and taking a loan.
When you withdraw funds from your retirement account and you're under age 59 1/2, you will be subject to a 10% penalty on the amount you take out. For instance, if you request $2000 there will be a $200 penalty when you file your tax return. In addition, the $2000 will also be added to your ordinary income and taxed at your ordinary income tax rate. So, if your ordinary tax rate is also 10%, then you will have to pay an additional $200 in taxes. This is a total of $400 you would not have to pay if you never took the withdrawal. But even worse (in my opinion) is that you will no longer have that money working hard for you as an investment.
Of course there are exceptions to the 10% penalty but they are difficult to come by and none of them are for buying Christmas gifts. The most common exceptions are medical, higher education and first home purchase.
If you must take money from your retirement account, requesting a loan is a better option if it is available to you. You will still be taxed for the additional income at the ordinary income rate, but you will not be assessed the 10% penalty. And, depending on the type of plan, the money will remain in your account to keep gaining interest and dividends until you retire. Just remember you will have to pay that money back and if you don't (or can't) it will be converted to a withdrawal, and you will be assessed the 10% penalty on the remaining balance of your loan.
Remember if you're considering either of these option please consult your tax professional to go over all your options and tax consequences.
When you withdraw funds from your retirement account and you're under age 59 1/2, you will be subject to a 10% penalty on the amount you take out. For instance, if you request $2000 there will be a $200 penalty when you file your tax return. In addition, the $2000 will also be added to your ordinary income and taxed at your ordinary income tax rate. So, if your ordinary tax rate is also 10%, then you will have to pay an additional $200 in taxes. This is a total of $400 you would not have to pay if you never took the withdrawal. But even worse (in my opinion) is that you will no longer have that money working hard for you as an investment.
Of course there are exceptions to the 10% penalty but they are difficult to come by and none of them are for buying Christmas gifts. The most common exceptions are medical, higher education and first home purchase.
If you must take money from your retirement account, requesting a loan is a better option if it is available to you. You will still be taxed for the additional income at the ordinary income rate, but you will not be assessed the 10% penalty. And, depending on the type of plan, the money will remain in your account to keep gaining interest and dividends until you retire. Just remember you will have to pay that money back and if you don't (or can't) it will be converted to a withdrawal, and you will be assessed the 10% penalty on the remaining balance of your loan.
Remember if you're considering either of these option please consult your tax professional to go over all your options and tax consequences.
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