Financial Information
Can I take money out of retirement accounts to start my business without a big ding?
Question : Can I take money out of retirement accounts to start my business without a big ding?
I want to start a business, but we took a second on our house when my husband started his business. It’s going OK, but not as fast as we’d like to see it. I need some cash to start another type of business, but need to do it now. Would it be better to put it on credit cards or take money from my retirement accounts? I thought I heard you can use money from your retirement accounts only to start a business because that is like funding your retirement.
retirement accounts
Best answer:
Answer by Sudip D
Hello
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Regards,
Sudip
Neither of the funding plans you have sounds too great. If you use credit cards the rate of interest you pay can be very high. On the retirement plan, if you are under age 59-1/2 you will have a penalty.
What is the premature distribution rule?
Distributions you receive from your IRA or retirement plan before you reach the age of 59½ are generally considered by the IRS as premature distributions (or early withdrawals). To discourage these premature distributions, they are not only subject to the usual federal and state income taxes on distributions but also to a 10 percent federal penalty tax (and possibly a state penalty tax). This 10 percent penalty tax is commonly referred to as the “premature distribution tax.” Fortunately, not all distributions before age 59½ are subject to this penalty. The IRS does allow some exceptions (see below).
You may be wondering why your age at the time of a distribution should have a tax consequence and, in some cases, be subject to a penalty. The reason is that the underlying purpose of IRAs and retirement plans is to provide income to help fund your retirement years and the federal government wants to make sure you use the money for that purpose. To accomplish this goal, the government generally imposes a penalty on taxable distributions taken before age 59½. The penalty encourages you (and other IRA owners and plan participants) to leave your money in the IRA or plan until that age or later. This, in turn, reduces the risk that you will run out of money during your retirement. The assumption is that by the time you reach age 59½, you are either already retired or near retirement and can safely begin to use your retirement money.
An exception:
Distributions made from a qualified plan (but not an IRA) after separating from service at 55 or older
To qualify for this exception, you must take the distribution from a qualified retirement plan after you have separated from service with the employer maintaining the plan, and your separation must occur during or after the calendar year in which you reach age 55. This exception does not apply to distributions made from an IRA. Also, if you roll over funds from the qualified plan to an IRA, this exception no longer applies to distributions made from the IRA.