Being in debt is one of the most horrible expenses ever. It completely takes away your peace of mind as the aftereffects of debts can be quite vital on your financial future, especially if you are late on your debt payments. In order to get the burden of debt off your shoulders, you can consider cashing in your retirement plans such as 401K or IRA. However, you should carefully consider all your other options to be debt free before finalizing on a single option.
Although using up your retirement savings fund can make sense sometimes, you have to keep in mind the tax ramifications that can occur in the short term and the financial pitfalls that can occur in the long term in regard to your decision.
These are the considerations you have to make before you take the plunge.
1. Evaluate carefully the other options available to you before you invade your retirement funds. There might be the option of taking out a loan from your 401K plan instead of drawing all the money out. In this way you can build back your retirement fund from amounts deducted from your paychecks on a regular basis.
2. In case you withdraw your money before retirement, you have to pay some amount of taxes. This can be almost up to 20% tax penalty depending upon your circumstances. You also have to pay ordinary income taxes on the withdrawn money.
3. You should contact your employer and request appropriate paperwork in order to process the withdrawal from your retirement plan. It is important that you do all the paperwork meticulously and keep a backup of the process.
4. Get in touch with the brokerage firm or mutual fund company with which you have your IRA. You should speak to a representative and inform him that you want to cash in some part or the entire amount of your IRA. The representative will be able to give you the correct picture on how you decision can affect your financial future.
5. You should ask the firm the send you the proceeds of the retirement fund in the form of a check to your home address. Conversely, you can ask them to transfer the money to your bank account. Having an account with the mutual fund or brokerage firm can allow them to wire the funds directly to your account.
6. Don’t do your taxes until all the paperwork from the brokerage firm is received with which you had your retirement account. You are accountable for those funds and pay for any due taxes when your tax return in complete.
Thus you can keep the following in mind before you venture out to withdraw your funds.