Limiting Damage if You Have to Raid Your Retirement Savings

by Stacy Francis, CFP®, CDFA

No matter how hard we try to focus on the positives and maintain an optimistic outlook on the future, no doubt things are getting ugly out there. This really dawned on me while reading a report from a recent out-of-state Savvy Ladies meeting. The main topic of discussion was IRAs – and not how to maximize contributions to them, but how to pull money out of them to cover living expenses.

As a general rule, pulling cash out of your IRA should be your very last resort. Not only does it jeopardize your retirement, but it is one of the least tax efficient ways to free up money, as such distributions are taxed according to your current bracket plus a possible 10% penalty tax. You also miss out on immense potential yields, as the money would have grown tax-deferred or tax free in the case of Roth IRAs for many years, had you left it in your IRA.

Still, these are tough times, and tough times call for desperate measures. If you have no other choice but to pull money out of your retirement account, at least keep the following in mind:

  1. You can loan money from your IRA without any tax consequences, as long as you reinvest the amount in full within 60 days. If you expect that your situation will be resolved shortly, this may be a viable option.
  2. If you have a 401(k), you can take out a loan against it, without a penalty. Note, though, that if you quit or are involuntarily terminated, you must pay back the balance in full or your transaction will be treated as a distribution.
  3. Also if you have a 401(k), under certain circumstances, you may be eligible for a hardship distribution.
  4. You may be able to take a distribution from your IRA without facing the 10% penalty tax (although you will still be charged according to your current bracket) to cover medical expenses adding up to more than 7.5% of your income or to buy your first home.

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