There are times in life where unexpected and overwhelming financial hardships can make it to where life is nearly impossible to continue on without some extra cash. While sometimes a payday loan or some type of personal loan can be enough to cover the expense, other times a more substantial amount is required. It is not ever a good idea to take money out of your retirement savings, sometimes life leaves you no other choice. The problem is, how do you go about getting emergency money out of your retirement? Here are some basics you should know before attempting to get any money out of your long-term savings accounts.
Proving You Need Money
The money is not able to be used to go on vacation or buy a new big screen television, but if there is a true hardship that will alter your life negatively, then most retirement plans will allow you to take out some money. Granted, retirement plans do not need to allow for withdrawals, but when there is a truly urgent situation, most have some type of process to help. You will be the one responsible with providing proof that this situation is going to have a severe impact on your life, but when emergencies arise, this is often relatively easy to do.
What Exactly Qualifies
There are certain circumstances that are considered universal hardships, but every plan is slightly different, so make sure to verify with your own as to what hardships you can qualify for. One of the most common hardships is unexpected medical payments. Huge medical bills that are not ever repaid typically qualify as a hardship, especially when a person younger than retirement age has medical expenses that surpass 10% of their gross income. Another hardship involves the residence the account holder lives at. There can be hardships to cover repairs, buying the home that this person will be living at for the long-term, or even to avoid a foreclosure on their residence. If you rent instead of owning, you can also typically qualify if you are about to be evicted from your residence as well.
Penalties Will You Be Facing
Once you are able to provide proof that you qualify for a hardship withdrawal, the next step is facing the consequences of that withdrawal. Usually there are two penalties that will hit the person withdrawing the money. The first is the income tax that will be required at the end of the fiscal year the money was withdrawn during. This can be a hefty bill to pay because it equates to an extra 10% of the money you borrowed, so make sure you keep it in mind come tax time. Second, there is also the penalty within the account. 401Ks do not like it when money is removed from them prematurely, so when you take out money, most of the time you are not allowed to start putting money back into the account for a full six months, as a deterrent against using the account for the wrong reasons.