Accessing Your IRA: What HNI Employees Need to Know About Early Withdrawals

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'While early access to IRA funds may seem like a solution to immediate cash needs, HNI employees should carefully consider the long-term impact of such withdrawals, as the penalties and lost compound growth can affect their retirement goals.' – Wesley Boudreaux, a representative of The Retirement Group, a division of Wealth Enhancement.

'HNI employees should approach IRA withdrawals with caution. While accessing funds early may provide short-term relief, it can undermine long-term retirement growth and hinder future financial stability.' – Patrick Ray, a representative of The Retirement Group, a division of Wealth Enhancement.

In this article, we will discuss:

1. The restrictions on borrowing from an IRA and the IRS regulations governing IRA withdrawals.

2. Penalty-free options for accessing IRA funds before age 59½, including exceptions for specific situations.

3. The 60-day indirect rollover as a short-term loan alternative and 401k loans as another option for accessing retirement funds.

When facing unexpected financial difficulties, many people look to their retirement savings as a potential source of funding. Unlike 401k plans, loans are not permitted from individual retirement accounts (IRAs). Despite this, there are ways to access IRA funds before the age of 59½ without incurring penalties. Understanding the rules governing these withdrawals and exploring alternative options can help you make more informed decisions about your finances.

Important Takeaways:

• - Loans against an IRA are not allowed, unlike a 401k.

• - Withdrawals from an IRA before age 59½ can be made without penalties under certain circumstances.

• - A 60-day indirect rollover can temporarily give you access to your IRA funds, potentially acting as an interest-free loan.

While retirement accounts like IRAs have restrictions to make sure they serve their long-term purpose, there are times when early access to IRA funds becomes necessary. Below, we explore the procedures and regulations surrounding early IRA withdrawals, along with options to potentially access funds without penalties or taxes.

Is It Possible to Borrow From Your IRA?

Unlike 401ks, IRAs do not offer the ability to borrow against your balance. The Internal Revenue Service (IRS) enforces regulations that prohibit direct loans from an IRA. In certain circumstances, you may be able to access IRA assets early; however, unless you qualify for an exception, this will result in taxes and penalties.

Early Access to Your IRA Funds

IRAs are intended to be long-term savings vehicles, so withdrawals made before age 59½ generally come with tax penalties. Once you reach age 59½, you can withdraw funds from your IRA, though they will be taxed as regular income if you have a traditional IRA. However, Roth IRAs have the potential for tax-free withdrawals, depending on specific conditions.

Besides taxes, early withdrawals typically incur a 10% penalty, but there are exceptions that allow penalty-free withdrawals.

Contributions to a Roth IRA

One of the advantages of Roth IRAs is the ability to withdraw contributions (but not earnings) tax-free at any time. Since contributions are made with after-tax dollars, only the principal is eligible for this rule. Earnings from those contributions must meet specific criteria to be withdrawn tax-free.

Options for Penalty-Free Withdrawals

While early withdrawals from an IRA usually come with penalties, the IRS allows penalty-free withdrawals in certain situations. Taxes on the amount withdrawn are still applicable, but there will be no penalty in these cases:

• Disability:  If you become disabled, you can access your IRA savings without penalty.

• Qualified Higher Education Expenses:  If you are using IRA funds for tuition, fees, and other educational costs, you may be able to avoid the 10% penalty, although taxes will still apply.

• First-Time Homebuyers:  You can withdraw up to $10,000 for the purchase of your first home, free of penalties, but taxes still apply.

• Series of Equal Payments:  Penalties are waived if IRA withdrawals are made over a five-year period in a series of substantially equal payments. The IRS determines the amount of these payments.

• Unreimbursed Medical Expenses:  If your medical expenses exceed 7.5% of your adjusted gross income, early withdrawals from your IRA can be made on a penalty-free basis.

• Distributions to Qualified Military Reservists:  If you're a qualified reservist called to active duty, you are exempt from the 10% early withdrawal penalty.

An Indirect Rollover for 60 Days: A Short-Term Loan

Although IRAs do not permit direct loans, there may be a way to temporarily access your IRA funds via a 60-day indirect rollover. This strategy involves withdrawing money from your IRA with the intent to transfer it to another retirement account within 60 days. When you return the money within the specified time frame, this can function as an interest-free loan, potentially bypassing penalties and taxes.

However, a few considerations apply when using the 60-day rollover:

• The 60-Day Rule:  The IRS requires that the funds be rolled back into the same or another retirement account within 60 days. If you miss this deadline, the withdrawal becomes taxable and may incur penalties.

• Withholding Taxes:  Unless you specify otherwise, the IRA custodian may withhold taxes from the distribution.

• Rollover Restrictions:  Regardless of how many IRAs you have, you can only perform one rollover per IRA in a 12-month period.

• Withdrawal Costs:  If you don't roll over the entire distribution, the remaining balance will be subject to taxes and penalties. Additionally, the IRA custodian may charge transaction fees for the rollover.

Consider 401k Loans as an Alternative

Unlike IRAs, 401k plans allow for loans. If you have a 401k with HNI, borrowing against your balance may be a simpler process than using an IRA. When you take a loan from your 401k, you are borrowing from yourself, and you will repay the loan with interest. However, if you leave your job, the loan may become due sooner than expected. The maximum loan amount is $50,000 or 50% of your vested 401k balance, whichever is lower.

It’s important to remember that loans from a 401k are considered taxable withdrawals, and penalties may be incurred if the loan isn’t repaid on time. Additionally, withdrawing funds from either your IRA or 401k can disrupt the compounding process, potentially affecting your long-term retirement goals.

The Bottom Line

While you cannot directly borrow from your IRA, methods such as the 60-day rollover offer a way to access funds temporarily. If you have a 401k through HNI, that may provide another option, but both methods carry risks and fees. The best strategy is to use retirement savings for their intended purpose—long-term wealth accumulation—and steer clear of early withdrawals that can hinder your financial progress.

If you're considering tapping into your retirement accounts, be aware of the long-term impacts. A study by Fidelity Investments found that early withdrawals from retirement accounts could cost individuals hundreds of thousands of dollars in lost compound growth over their lifetime. ¹  Make sure to consider all your options, follow IRS rules, and consult a financial advisor to help mitigate penalties and taxes while allowing your retirement funds to continue growing.

Think of your IRA as a garden carefully cultivated for your retirement. While it might be tempting to harvest from it early, doing so can stunt its growth. Instead, use options like a 401k loan or a 60-day rollover to maintain your financial health, allowing your retirement garden to flourish for the years ahead.

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Sources:

1. Fidelity Investments.  IRA Early Withdrawals: Penalties, Exceptions & Options. Fidelity Investments, ongoing updates.  Fidelity.com .

2. Internal Revenue Service (IRS).  Exceptions to Tax on Early Distributions. IRS, ongoing updates.  IRS.gov .

3. Investopedia Staff.  '10 Penalty-Free IRA Withdrawals.' Investopedia, 21.5 years ago.  Investopedia.com .

4. Bankrate Staff.  'What Is the 60-Day Rollover Rule for Retirement Accounts?' Bankrate, 4 months ago.  Bankrate.com .

5. Investopedia Staff.  '401(k) Loans: Reasons to Borrow, Plus Rules and Regulations.' Investopedia, 16.9 years ago.  Investopedia.com