Tax Tip from the week of November 28, 2005
IRAs and 401(k) plans offer tax-favored ways to set aside money for your retirement. But what if you need to tap into your savings before you reach retirement? At a minimum, there’s usually a penalty if you withdraw funds before you reach age 59˝.
There are situations in which you can access your savings without penalty, however. The recent Hurricane Katrina legislation allows victims to make penalty-free withdrawals from their retirement accounts. And there are special circumstances in which anybody can tap into their IRA or 401(k) accounts without penalty.
First, though, a word of caution. Your money is in these accounts to grow tax-free and to provide for you in later years. You should withdraw funds from these accounts only as a last resort.
Katrina victims
Obviously Katrina victims may need immediate funds to begin rebuilding their lives. If you’re a victim, you can now make penalty-free withdrawals from retirement savings of up to $100,000. You can also spread the income taxes on the withdrawals over three years. And if you can re-contribute the money back into your retirement plan within three years, those taxes will be refunded. In effect, you can have three years of penalty-free access to your retirement savings.
Others
Even if you’re not a Katrina victim, you can still get early access to your retirement savings for certain hardship needs. These include paying medical bills or insurance, higher education expenses, and first-time homebuyer expenses, among others. Special restrictions apply to most of these situations.
Leave your retirement savings untouched if at all possible. But know that there may be ways to access your money if you really need to. Please contact our office if you would like more information.
Seattle Bellevue Tax Accountants
# posted by
Seattle Tax Accountant Tax Tips
@ 2:34 PM
0 comments
