Should You Crack Your Retirement Nest Egg?

More and more, people are considering a raid on their retirement funds. Some to pay off accumulated debt, and others because they cannot stand the psychological impact of watching the value of their retirement funds shrink
Sadly, many feel driven by necessity due to the dismal economy and its affect on the job market. In many cases using retirement funds in an attempt to postpone foreclosure, or to pay down personal debt is only a temporary solution, and the problem is compounded when tax time arrives.
Consider this: Retirement accounts are protected in case of bankruptcy or other debt collection efforts.
For those affected by volatility in the markets, resist the urge to lock in your losses by withdrawing retirement funds.
Consider this: Leave the funds in your retirement account and reallocate them to less volatile money markets or high-grade bonds. Remember, if you don't have time for the market to recover, you certainly don't have time to start saving all over again for retirement.
Retirement accounts funded with pre-tax dollars will be taxed on withdrawal. A hardship withdrawal will not exempt you from the tax, or the ten percent penalty if you are under age 59-1/2. The penalty exists to discourage using retirement plan funds for any purposes other than retirement.
Consider this: what will be your standard of living in retirement if all you have to depend on is Social Security?
When consulting with a financial advisor, be sure to explain what your concerns are and the reason for your request. In addition, you should consult a knowledgeable tax professional about possible tax consequences before making any irreversible decisions on this matter.
Consider this: Are there other options with less overall financial impact? Ask about loans from 401k/403b, penalty free distribution if you experience separation from service (for any reason) at 55 and over, or a 72t distribution.
If you still feel that raiding your retirement account is your only option have the fund manager withhold twenty percent (or more depending on your tax bracket) for the IRS, plus an additional ten percent if you are under age 59-1/2. This should cover some, or all, of the tax and early withdrawal penalty come tax time.



Heidi Herne is the sole proprietor of Green-eology.com, an online shopping portal and blog. Go Green! Pass It On! She is a Partner in an IT Consulting Firm, a freelance writer, a website author, an online business coach, and a Senior Tax Advisor with a leading US Tax Firm. The views expressed here do not reflect on any affiliations of the author.