As unemployment rates reach levels that haven’t been seen for decades, a larger number of Americans are reaching into their retirement savings to help make ends meet.Bank of America recently released a survey on retirement savings, and nearly 20 percent of respondents said they had drawn from retirement accounts to help pay bills since the downturn began.
Drawing from retirement savings often has serious repercussions because the tax consequences are high in the short and long-term financial health is impacted.
"Taking a distribution from a retirement account is one of the least tax-efficient places from which to get the money," Mark Nash, co-author of Pricewaterhouse Coopers' 2009 Guide to Tax and Financial Planning, tells MarketWatch.
Those who withdraw must pay an addition 10 percent penalty if they are under the age of 59 and a half. In addition, the amount that is withdrawn is considered income, so it could also affect other benefits that an individual or household receives based on their income.
If withdrawing from retirement funds is the only option a person has, there are certain circumstances that can lessen the penalties. For example, first-time home buyers can take a one-time distribution of $10,000. This money is still considered taxable income, but even if the person who withdraws is under the minimum age, the $10,000 is not subject to the additional 10 percent penalty.
Other situations such as medical expenses that exceed a certain percentage of income or college tuition can also sometimes exempt the borrower from paying the additional 10 percent penalty.
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--Bridget O'Sullivan
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