Your Individual Retirement Account (IRA) is designed to be a safe savings option along with its tax exempting character. However, smart investors will look beyond these known benefits and leverage the borrowing option to their advantage. Alongside smart investors, investors in need may also want to exercise their option to borrow money from their IRA. In both cases, the nuances of how to take money out of IRA goes a long way in ensuring optimal borrowing decisions.
IRA Withdrawal Rules
If you take money out of an IRA, you expose yourself to a penalty of 10% and an additional tax burden (equivalent to the amount you had saved by investing in the first place). The two important numbers in terms of age restrictions for withdrawals as of today are 59.5 years – after which you can withdraw your IRA money without any penalties – and 70.5 after which the investor is required to mandatorily draw down the account. In addition to the age criteria, investors are also allowed to take money out of IRA (Roth IRAs in particular) in special cases – IRA hardship withdrawals include disability, death, tuition fees qualified under IRA clauses, annuitization of the account and buying a first home (in which case you can withdraw up to $10,000).
If you qualify, you can try to avoid the IRA withdrawal penalties by following the IRA withdrawal penalty exceptions that are available.
Sometimes borrowing or withdrawing from a retirement account does make sense, despite the penalty it attracts. For instance, you have an outstanding loan with a rate of repayment well over what you would be paying in the form a penalty plus the tax rate. However, even in such cases, think twice before you erode your retirement income. The conservative school of thought will tell you that usually investments work this way – you end up needing the most what you thought would be the least needed.
Retirement planning certainly falls into this group of under-hyped and under-prioritized investment avenues, particularly if we are far from it in terms of years. We feel the itch to draw money from it (particularly when it makes number sense as in the case mentioned). However, don’t forget the power of compounding and also remember that retirement planning is even more important than other investments such as child education planning.
You will be able to get a loan for your child’s education, but never a loan for your retirement!