Retirement funds are one of the best ways to start planning for a future without work and obligations, and it begins with putting some of your hard-earned cash into an account and letting it grow. Nearly 20 percent of people in the United States have dormant retirement funds, and that money is an excellent place to look when in need of emergency funds.
No one starts a retirement account with the idea of taking money out before retirement. Still, you never know what could happen in life, and knowing that you can draw money from that account is a life-saver.
The good news is that retirement withdrawal is possible, and there are steps you should take to maximize your money. Continue reading to learn the best tips and tricks to draw money from your retirement savings today!
Find a Financial Advisor
The first step you should take before touching your retirement savings is to consult with a financial advisor. The financial advisor will guide you toward finding the best amount of money to remove from your account. They’re also experts on the guidelines and penalties for early retirement withdrawal with these accounts.
The process of withdrawing money from a Roth IRA differs from a 401k. Research will help you better understand the method, but working with a financial expert before taking action is still advisable. Their expertise is ideal to guide you and help you maximize your money.
Determine Your Receiving Method
You have multiple options when choosing to draw money from your savings account, with several automatic withdrawals being one of the most popular options. You can also request to receive the money from your retirement fund in a large lump sum.
Start by reviewing the rules of the savings account you set up when planning for retirement. You’ll know what’s required and what to expect when the money leaves your retirement savings and enters your checking account.
Contact Your Financial Institution
The next step involves contacting the financial institution that holds your retirement fund. It’s best to inform them you’re ready to draw money from your retirement savings.
Some financial institutions will require you to handle the process in person, while others help you start it online through their website. Determine which approach is available and suitable for you when accessing your emergency funds penalty free.
Process the Paperwork
After notifying your financial institution that you want to draw money from your retirement fund, the institution will ready the paperwork and begin the process. Patience is best when waiting for the paperwork to go through.
Review the paperwork before allowing the institution to submit it on your behalf. Ask for clarification or assistance if you’re confused by the terms or conditions outlined in the paperwork before signing anything. It’s best to make an informed decision when accessing your retirement savings.
Receive Your Money
You’ll receive the money from your retirement fund after the paperwork is processed by all parties involved. After the paperwork goes through, the money you’re drawing will be dispersed and sent to your chosen account. It’s one of the most effective ways to access emergency funds when money is tight.
Other Alternatives to Draw Money
You can also take other paths to draw money from your retirement account when in need. An early withdrawal is a route worth considering, as is requesting a hardship withdrawal. Here’s a deeper dive into all your options when drawing money from your retirement fund.
1. Early Withdrawal
People most commonly draw money from their retirement savings to handle unexpected expenses. Withdrawing money from your retirement fund is viable, but it does come with potential penalties you’ll need to consider.
You’ll face an uphill battle if you’re 59 or younger. The penalty includes a 10 percent penalty, and you’ll pay income taxes on the money you draw from the account. The combination of those two factors will cost you a lot of money.
Drawing your money out early also harms the growth of the money in your savings account. Your account builds wealth off the interest of the money in your account. The smaller your retirement fund is, the less money the interest generates.
Weigh the consequences of a retirement withdrawal before determining if it’s the best path for your finances and retirement. You’re forfeiting the money compound interest would have generated.
2. Hardship Withdrawal
The hardship withdrawal is your best action if you require emergency funds. You avoid the 10 percent penalty for early withdrawal when you’re granted a hardship for your situation. Your financial institution determines if you’re eligible for the hardship waiver.
Not all plans offer a hardship option. Contacting your financial institution and working with a financial advisor is the best path toward determining if it’s a viable option for your situation.
Standard options that qualify for the hardship are medical bills, costs related to your housing, tuition, and funeral expenses. Contact your financial institution about a hardship withdrawal if you face any of these issues.
3. 401(k) Loan
You can also use a 401(k) loan to avoid paying the 10 percent penalty when you need emergency funds from your retirement account. Some plans allow you to take out a loan by borrowing from your retirement plan. This option grants you the money under the condition that you pay back what you borrowed plus interest within five years.
It has the added benefit of not showing up as debt on your credit report. You can borrow from your savings without harming your credit. It’s a massive win when you’re using money from your retirement fund to purchase a house or property.
Determine If Retirement Withdrawal is Right for You
Choosing to draw money from your retirement fund is a massive decision, and you must take the proper steps to avoid losing money. Hiring a financial advisor for guidance is wise since they have the knowledge and resources to help you determine the optimal amount of money to withdraw. It’s wise to read over the paperwork before proceeding to determine if the costs are worth it for emergency funds.
Making the most of your money is vital to live a happy and fulfilling life. Read more of our Business blog content for the best tips for your money management today!