Asian Journal- The Filipino-American Community Newspaper

YOU’RE probably one of those employees wanting to tap your 401(k), 403(b), or other retirement accounts to get you through dire financial need. With unemployment rate hovering at more than 12% and consumer spending continuously increasing, your choices must have been exhausted so you’re left with no choice.

You assume withdrawing your retirement savings should come in uncomplicated and effortless; after all, it’s yours.

But doing so should be dealt with great caution and prudence as it comes with costs.

A hardship withdrawal and loan are two distinct methods. Withdrawal poses more challenges and costs than taking out a loan. Once withdrawn, you lose the option to put it back to the savings account and become a taxable event; meaning, you’d have to pay your taxes relevant to your tax bracket.

The IRS considers it this way: the money that went to the account was tax-free so once it’s taken out of the account, it becomes a "source of income" that’s added to your annual gross income. (Remember, the only things tax free in America are life insurance and Roth IRA).

Realizing that workers would not want to put substantial amount of savings through many years without any access to it, legislation has devised terms and conditions for workers to be able to take hardship withdrawal. They include:

To buy a primary residence.

To prevent foreclosure or eviction from your home.

To pay college tuition for yourself or a dependent, provided the tuition is due within the next 12 months.

To pay un-reimbursed medical expenses for you or your dependents.

But the IRS still discourages these withdrawals by imposing a 10% penalty if you’re less than 59 ½ years of age. However, you could qualify for a waiver of early withdrawal penalty if you meet one of the following:

You become totally disabled.

Direct rollover to an Individual Retirement Account (IRA).

You are in debt for medical expenses that exceed 7.5% of your adjusted gross income.

You are required by court order to give the money to your divorced spouse, a child, or a dependent.

You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.

You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59½, whichever is longer)..