The current prolonged economic downturn has had a detrimental effect on the finances of millions of American families. While this isn’t news to anyone reading this blog, what is important is the fact that families may be withdrawing funds from an IRA to pay daily expenses during a period of unemployment or considering if they should. Here’s some information that anyone who is considering prematurely tapping into an IRA should be aware of.
Is It Necessary?
A first question is can you avoid withdrawing from the IRA? Do you need the money to pay for essentials or are you using the money to maintain a previous lifestyle? Perhaps you could afford the premiere satellite TV package when you were working full time but do you need all those channels while you are unemployed? If you withdraw from the IRA for current extras you are potentially jeopardizing your future for current fluff; essentially you are putting a crack in your nest egg for non-essentials.
Consequences of Early Withdrawal
With a few exceptions, there is an automatic 10% penalty for early withdrawals from an IRA, where early withdrawal occurs before age 59½. This means that you pay 10% of the amount you withdraw to the IRS along with any income tax that you owe on the withdrawn amount. In essence, you are throwing away 10% of your money for the privilege of accessing it.
However, there are several cases where the 10% penalty is waived that are applicable to this discussion. These include permanent disability; unreimbursed medical expenses that exceed 7.5% of your adjusted gross income; and payment of medical insurance premiums if you’ve received unemployment benefits for at least 12 weeks.
Another financial consequence of withdrawal from an IRA during this economic downturn is that the money is being withdrawn at a time when the value of the account is low. While virtually every portfolio has lost value during this recessionary period, historically a recession has been eventually followed by a period of recovery. Funds withdrawn from the IRA will not benefit from the upturn in the economy. It’s another example of why an IRA withdrawal at this time is not prudent.
The bottom line simply is don’t withdraw from your IRA at this time unless absolutely necessary. Look to other sources first.
Larry Parman
Attorney at Law
- Understanding IRA Inheritance Planning: Key Considerations - September 14, 2023
- Irrevocable Trust Decanting Provides Flexibility - September 12, 2023
- Inheritance Planning Solution for a Spendthrift Heir - September 7, 2023
