USE Credit Union
Checking & Savings

Should You Tap Into Your Retirement Accounts?

If you are like most people life occasionally comes at you in unexpected ways.  Things are going smooth, paying bills, saving a little here and there, maybe taking a vacation or two each year, right?  Life is good. Then, you hear an unusually odd sound when you are driving your car.  Or, maybe your Thursday evening softball league game nets you two broken teeth, or better yet, you find out about an unexpected increase in tuition at your child's college that is due next month.

Whatever the situation may be, sometimes people encounter situations where they have a need for a large amount of cash.  In most instances, there are two places to obtain that cash:  1) ask someone else for assistance in the form of a loan; or 2) use your retirement savings.  When deciding whether or not it is a good idea for you to dip into a retirement account, there are some simple things to consider to help you make a solid decision.

The first thing you should do is analyze what the funds will be used for because the answer to that question will have an impact on how an early withdrawal from a retirement account is viewed.  In most cases, withdrawing money from a retirement account early will cost significantly more than had you waited until you reached retirement age to withdraw the money.  In addition to paying an early distribution tax of 10% on early retirement account withdrawals, the additional amount added to your current income could change your taxpayer status, resulting in a higher percentage of tax assessed against your annual income.

However, in certain instances, an early withdrawal of retirement account funds may not be subject to tax ramifications.  For example, early withdrawals from retirement accounts used to pay for certain medical expenses, college education expenses, or a first-time home purchase may avoid payment of an early distribution tax.  So, if the intended use for your funds falls within one of the early distribution tax exceptions, using retirement account funds may be the best option for you.
Next, you must decide whether or not you should consider the overall cost of dipping into a retirement account early.  If your need does not fall into one of the limited early distribution tax exceptions mentioned, you should compare the cost of using money from your retirement account with the cost of acquiring money from another source.  If you are in need of $25,000 to pay for water damage caused to your home that are not covered by insurance, and you do not have that amount available in liquid accounts (e.g. checking, savings, money market accounts, etc.), your options will likely be obtain a loan or make a withdrawal from a retirement account.  While taking money out of your retirement account may lead to penalties, and possibly additional tax consequences in the future, it may still cost you less than it would to repay a loan for the same amount. It depends on your situation and your ability to repay a debt quickly, though.

Finally, you must look at the opportunity cost of your decision.  Opportunity cost is not what the current cost is, but rather the value of what you would give up.  So, using the above example, if you need to withdraw $25,000 from your retirement account in order to repair your home, the opportunity cost is not just the money you took out of the account, but also the value that money would grow to on the day you would ultimately use the funds.  This is a more difficult assessment to make because it is less tangible that the first two.  But, this may be the most important part of the process, because the impact of a diminished retirement account will likely not be felt until after you have passed your prime income earning ages.

While many people have significant assets in retirement accounts, withdrawing money from those accounts can have many unintended consequences.  If you have questions about your financial situation, please contact one of your contact center representatives at 866.873.4968, or stop by any of our branches.

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