You've built a financial fortress with several walls of protection. Now, facing a job loss, you need to decide which bastions to hunker down behind. There are advantages to tapping certain accounts and assets before others. "Jobless benefits and personal savings would be the first line of defense," said Gary Daniels of Personal Financial Mavens in Payson. After that, he said, it's often a matter of individual circumstances. Ideally, like a stout castle, you will have several rings of defense, perhaps with a moat and drawbridge for good measure. Occupying the innermost sanctum of your castle should be your retirement accounts.
Financial advisers routinely suggest restraint before withdrawing retirement money, even when times get tough.
If you pull cash from 401(k)-style plans or traditional Individual Retirement Accounts, you would trigger federal and state taxes, typically on the full amount. You also face a 10 percent early-withdrawal penalty if under age 59 1/2, though that drops to age 55 if you pull money from 401(k) accounts and you're laid off or leave the job for other reasons. "The taxes are almost always much higher than expected, often more than 40 percent of the amount withdrawn if there is a 10 percent early-withdrawal penalty," Daniels said.
Taxes and penalties even could apply on early withdrawals from Roth IRAs.
But taxes aren't the only reasons to leave retirement accounts alone.
With withdrawals, you'd also be depleting your retirement savings and raising the likelihood of having to rely solely on Social Security in old age. As it is, millions of Americans already are way behind in retirement planning. "An issue even bigger than taxes or penalties is what your account could be worth in 10 or 20 years," said Stephen Barnes, a certified financial planner and chartered financial analyst at Barnes Investment Advisory in Phoenix.
Plus, you'd be removing money from accounts that enjoy legal protections.
"Both federal and Arizona laws protect $1 million or more of retirement funds from creditors in a bankruptcy," said Daniels, who is also a certified public accountant.
If you withdrew money from retirement accounts, those amounts would be subject to regular taxes and possibly penalties that probably wouldn't be discharged in a bankruptcy proceeding, he said. But while many jobless and underemployed Americans seem to recognize these dangers, they still might not be able to avoid retirement-account withdrawals if their employment problems persist.
Respondents in a new survey by the Transamerica Center for Retirement Studies said they relied mainly on jobless benefits and personal savings during the first year out of work or being underemployed. But after a year, more survey respondents started using credit cards heavily and draining their retirement accounts. Read More
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