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Published: Sunday, February 3, 2013, 12:01 a.m.

If you tap your retirement account, it's going to hurt

Retirement accounts don't always last until retirement. That's a sad fact due, in many cases, to withdrawals and loans that many people take from IRAs and similar accounts.
A study shows that $70 billion a year is withdrawn from retirement accounts by people who say they need the money to pay current bills, according to an NBC report posted at For those individuals, the long-term cost is staggering. That money -- and the compound interest it would have earned -- won't be there when retirement comes. By then, they will probably be trying to get by on greatly reduced incomes.
Financial penalties are steep for early withdrawals from retirement plans. But the Internal Revenue Service has strict rules (of course) that allow for "hardship withdrawals" from retirement accounts including 401(k)s and IRAs. For 401(k) plans, an imminent foreclosure, medical expenses and funeral expenses may be among the permitted reasons for withdrawals, but plans can differ on the criteria and aren't required to make allowances for withdrawals at all. IRA rules do waive penalties for withdrawals that go toward higher-education expenses and first-time home purchases. And there are provisions for withdrawals related to Hurricane Sandy. Here's a FAQ at the IRS site that attempts to spell out the tangled regulations.
Financial adviser Don Taylor, known as "Dr. Don," has numerous posts at that touch on the tough business of borrowing or withdrawing funds from a retirement account. In this post, he outlines the stiff cost of using your retirement savings to dig out of credit-card debt.
There is a way to take a short-term (60-day max) loan from your IRA account without penalty. But it's a minefield. A "Tax Guy" post by Bill Bischoff at Smart Money explains what to do, if you have to. IRA rules treat a withdrawal as if it were an account "rollover" -- if the same amount of money shows up again in an IRA within 60 days. But if you miss the repayment, even by a day, you'll owe income tax and an added 10 percent penalty to the real tax man at Internal Revenue.
Story tags » Personal Finance

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