In the United States, it is very common for people to save up by opening retirement accounts. The problem with this kind of set-up, however, is that the money is expected to stay in the account until you reach retirement age. But what would you do in case of emergencies? Of course you can take out your money from your retirement account even if you are not yet retired. But you have to understand that this would lead to penalties and other tax deductions.
Most of the time, people open an employer-based or an individual retirement account that would be tax-free once they reach 59 and a half. The catch, however, is that if you decide to take some money from your retirement account before you reach your retirement age, it would usually be subjected to state and federal taxes on top of a 10 percent penalty. Yes, withdrawals will have tax deductions because these are considered as “incomes.”
Withdrawing your money before your retirement age is similar to pulling out an investment at the worst possible condition of the market. It’s like selling equities in a down market, a move that would nonetheless cut the probability of earning more from your business.
Thus, before meddling with what’s in your retirement account, you should try to look into other alternatives such as applying for a home equity loan, taking a line of credit, or asking a friend or family member for some money to borrow. These three are great alternatives, especially if you are expecting something some income in the future.
Aside from these, one must think about an intra-family loan which is a really good option since the interest rates set by the Internal Revenue Service are very minimal. In August, for instance, the interest rate was at a measly 0.3 percent for loans that will run for three years. For loans that will for more than nine years, meanwhile, the rate was set at only 4 percent. Think about this, loaning $20, 000 will only have an interest of somewhere between $60 and $800 annually.
Also, employers can also allow you to take a loan from your employer-based account. Legally, you can borrow $50,000 or up to half of the balance in your account. The good thing with this choice is that you have to pay your loan with interest, but since it’s your money, you’re actually paying yourself. Just make sure, though, that you would not be fired from your job.
And while in most cases you are advised not to tap your retirement savings, one situation is an apparent exception. That is, of course, when you are buried with credit card debt and that you are paying interests with very high rates.
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