My husband has a serious lung disorder. We recently discovered that he breathes better in lower-elevation coastal areas. We want to move as quickly as possible because of this, but we have about $23,000 worth of credit card debt. I know that if we can pay it off, we will be quickly able to save the money we need to move. I have investigated the traditional ways of earning money and paying down debt. Neither of us can work more hours or take a second job. We don't own a house or anything that could be sold more than a few hundred dollars total. We don't live extravagantly. So I'm looking at my $17,000 retirement fund. I know there are heavy penalties for withdrawing early (I am 33), but frankly, I'm ok with losing some money in the long term if it helps us move sooner to somewhere that he can breathe. Our income tax bracket is 15%, so I think we'd be taxed at $2550. The 10% fee is $1700, so total we'd lose $4250 but we'd have $12,000 to put towards our plan immediately. With that kind of money, we could move out of the mountains before next winter, which is getting increasingly harder on his lungs. I know it is traditionally a bad move to withdraw early, but this is a matter of health and it is time sensitive. Before I go to a tax consultant, please help me get a general idea if I have all the fees down. I really appreciate this.
Understandably, you need access to your retirement funds now. An ancillary benefit to retirement funds is the ability to gain access in case of an emergency, so don’t feel too bad about accessing the funds as you have good cause. Regarding the fees, this is a little difficult to answer. You did not specify the type of retirement account. You stated it was a traditional retirement account which leaves several possibilities. I will assume it is a 401 (k) as you stated you are subject to a 10% “fee”. Based on this assumption, I think you are assuming too low of an amount that you will lose. You need to remember that you are taxed on the full account balance. Effectively, you lose 10% of the 17k and then are taxed on the full account balance, or 17k. Second, assuming you will pay the same taxes in your current income bracket is a mistake. Remember that the 17k will be added to your annual income and the taxes will be based on the aggregate amount. Adding 17k to your taxable income will usually push you into a higher tax bracket.
Though this may not solve your problem, I will remind you that most retirement accounts have loan or hardship features. I would suggest contacting your provider and asking if you are eligible for one of these programs. It may make more sense to take a loan against your retirement fund. It can solve your short-term problem while maintaining the long-term integrity of the account.
I hope this information helps you Find. Learn & Save.