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The Pitfalls of Pulling Early from Your Retirement

September 23, 2014

A retirement fund is like the piggy bank that you only break open after retirement. Sometimes, though, due to unforeseen circumstances, people are compelled to take money out of their retirement account early. This can be for paying off debt, buying a new house, a car, or for healthcare. There are tax implications in making retirement withdrawals, which are important to keep in mind.

If you withdraw any amount from your retirement fund before it has matured, you will be charged a penalty for making an early withdrawal. An early distribution penalty of 10 percent is charged if you withdraw any amount of money from your retirement fund before you are 59 1/2 years old. The penalty increases to 25 percent if you had established a SIMPLE IRA less than two years ago and you are now making an early withdrawal from it.

An early withdrawal is taxable. This means that any withdrawal made before you are 59 1/2 years old from your retirement plan is treated as income and is, therefore, taxed. Before making a withdrawal, you should calculate the amount of tax you’ll need to pay along with the penalty to determine if this is truly to your advantage.

The amount in tax that you will need to pay on your withdrawal is based on how much you take out, what type of retirement plan you have, your age when the retirement plan was established, and what the funds will be used for. If you make a large withdrawal, be aware that it may change your tax bracket and affect what you owe in taxes.

A penalty is not charged for making early withdrawals from an IRA if you are withdrawing funds from your retirement plan to buy a house for the first time, or if you are unemployed and paying for health insurance and medical expenses.

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