Carnegie Investment Counsel Blog

Need Cash? Use Caution Before Dipping Into Retirement

Posted by Linda Fousek on Nov 25, 2014 12:30:00 PM


From clients looking at home repair and remodeling projects, from a new roof or windows to a new kitchen, I'm frequently asked which is the best way to withdraw money to pay for these “upgrades.” Should you use your investment account or retirement account, such as an IRA?

In most cases, withdrawing from your savings or investment account makes the most sense. Securities may need to be sold to raise the needed cash, but tax is paid only on the realized gain from the sales, not the total amount of dollars distributed, and capital gains tax rates are typically lower than ordinary income tax rates. Ideally, you should plan ahead before you embark on an expensive outlay; We can assist you if you're looking to beef up an investment account that is destined to become that new addition to your dream home.

When monies are distributed from a retirement account (IRA), the distribution is treated as taxable income and subject to ordinary income tax rates. In addition, if you are under the age of 59½, the Internal Revenue Service considers these as premature distributions and hits you up with a 10 percent penalty charge.

From a tax perspective, you are probably better off taking the needed money out of savings or investment accounts.

There are times when it is okay to use your retirement savings early. You can use IRA money to pay for higher education expenses or to help purchase your first home without incurring the early withdrawal penalty.

No penalty will be assessed as long as your IRA money goes toward qualified schooling costs for yourself, your spouse, or your children or grandkids. Be aware you must satisfy certain student eligibility and school accreditation requirements for this to apply.

The IRS lets “first-time homebuyers” put IRA monies toward the down payment on a new home. Tax rules apply to dollar limits on the down payment as well as who is considered a “first time homebuyer”. Different rules apply for a traditional IRA vs. a Roth IRA. 

Members of the military reserves may be able to receive early IRA distributions without penalty under certain conditions. Early IRA withdrawals without a penalty may be available in certain hardship cases as well.

Even though the penalty for withdrawal will not be assessed by the IRS, this does not eliminate the ordinary income tax bill on the monies withdrawn. So, you'll probably still owe taxes.

Be sure to consult an advisor to review the best option for your unique circumstance and applicable rules. In short, it's best to use money from your savings or investment account before you dip into retirement and find yourself in the "penalty box."

Please contact us if you have specific questions about your withdrawl options.

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Topics: Investing

Linda Fousek

Written by Linda Fousek

Linda Fousek serves Carnegie Investment Counsel as Portfolio Manager. With experience, integrity, and empathy, Linda helps her clients reach their unique financial goals. Linda’s focus ranges from working with individuals and families to endowments and foundations as well as public funds.

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