HOW MUCH DID YOU SAY I OWE IN TAXES?

"Retirement accounts are the worst place to turn for emergency money."

Bill Harris, President W.V.H. Inc.*

So many of the people I meet while reviewing their financial situation or preparing their taxes are shocked at the cost of using their IRA, 401(k), 403(b) or non-qualified annuity before retirement. Granted, it is a great quick fix to any cash flow issues but it comes at a heavy cost. ALL WITHDRAWALS FROM THIS ACCOUNT ARE TAXABLE AND CAN HAVE A STEEP PENALTY IF WITHDRAWN BEFORE 59.5! The following are the pitfalls to specific retirement accounts:

• IRA

1. Pre-taxed withdrawals from your IRA are not only taxable but taxable as ordinary income. That means that it is added to your other income. Thus, you could end up being taxed in a higher tax bracket and paying yet more tax.

2. An additional 10% federal tax penalty is assessed if you are younger than 59.5. Depending on your income level, you could lose up to 60% of that $20,000 you needed for the emergency.

3. You have just lost the valuable power of a tax deferred IRA and all the compounding interest that comes with deferring taxes until retirement.

4. Your retirement income that you need to last you the rest of your life just took a big hit. Once you retire, it is very hard to recover. Even if you have a Lifetime Income Rider your income can significantly be impacted.

• 401(k)

1. Some 401(k) plans have a loan provision. If you borrow, it is not a taxable event. It does lower your retirement amount available.

2. The loan must be paid back in 60 days or it becomes a taxable event.

3. Pre-taxed withdrawals from your 401(k) are not only taxable but taxable as ordinary income. That means that it is added to your other income. Thus, you could end up being in a higher tax bracket paying yet more tax.

4. An additional 10% federal tax penalty is assessed if you are younger than 59.5.

5. You have just lost the valuable power of a tax deferred 401(k) and all the compounding interest that comes with deferring taxes until retirement.

• 403(b)

1. A 403(b) plan is a retirement plan established for the benefit of employees of public schools and certain tax-exempt organizations. These plans accept payroll-deducted contributions for participant-directed investing and are intended to help the employees meet long-term objectives, such as generating retirement income.

2. Some 403(b) plans have a loan provision. They are generally limited to 50% of your account balance or a maximum of $50,000, whichever is less, and generally must be paid back within five years with interest.

3. Pre-taxed withdrawals from your 403(b) is not only taxable but taxable as ordinary income. That means that it is added to your other income. Thus, you could end up being in a higher tax bracket paying yet more tax.

4. An additional 10% federal tax penalty is assessed if you are younger than 59.5.

5. You have just lost the valuable power of a tax deferred 403(b) and all the compounding interest that comes with deferring taxes until retirement.

These valuable assets need to be USED LAST, not first when an emergency arises. Seek out all other alternatives before you use your tax-deferred sources. Always check with a professional before you make a major financial decision. NOT AFTER!

*Reference: An Insider’s Guide to Bank CDs, Annuities, and Retirement Planning. Bill Harris, President W.V.H., Inc