Avoiding Tax Penalties in the Retirement Game

Saving for retirement can get tricky — you don’t want to plunge into saving for retirement without thinking about your tax implications. Of course, taxes are a pretty lengthy and even a pretty sticky subject. This guide is meant as general advice — when you’re ready to push forward, you will want to make sure that you’re actually getting the advice of a tax professional, such as a CPA well versed in these matters. Your retirement advisor is also a good choice, especially if you are paying them on a fee basis. When your advisor does not make a commission from you based on the advice they give you, they tend to give you much more solid advice from a more ethical standpoint.

In either case, the goal here is to not only be aware of what taxes you will need to pay, but also the type of mistakes that you’ll need to avoid in order to keep your nest egg. You see, the government is very particular on how you actually keep pre-tax money. If you invest in a retirement account that is tax-deferred, you will actually be keeping money away from the government for a very long time. Therefore, you must make sure that you are actually playing by their rules rather than just assuming that you can just do anything that you want.

First and foremost, you must ensure that you do not touch the money in your account. There are a few qualified expenses that allow you to tap the funds that you put into certain retirement accounts, such as buying your first home or funding part of your child’s education. However, it’s safer to just leave the money in your account at all times. Why? Well, in a nutshell, when you take money out of your account, you’re taking out money that will be funding your retirement. The compounding of interest is something that can really make your money grow over time, and it’s been proven that even if you don’t have a lot of money, it’s best to start funding your retirement now rather than later. There are other short term solutions to raising money than tapping your retirement accounts, but there are times where it cannot be helped.

If you don’t make sure that the money is being withdrawn for a qualified purpose, you’ll have to not only pay taxes on the amount, but you’ll also be hit with a 10% penalty for withdrawing the money before you reach the qualified age — in this case, it’s 59 1/2.

Again, this is general advice, and you will still need to seek out the advice of a tax professional that can give you specific advice tailored to your situation. Indeed, you may have circumstances that make it sensible to withdraw from your retirement account.

Don’t forget that in some cases, you will have to take out the withdrawal as a loan against the balance of your retirement account. In other words, you will have to pay yourself back with interest — but this can only help you in the long run.

Overall, these are just a few points to keep in mind as you plan your retirement — with a little determination, your dream of retirement really can come true!