There's no way that this millennial ^^^ is thinking about pensions.
Yo yo everyone! Today I have Trisha Miller from That Dang Vegan (cool huh?) on the site today laying down some pension fund (aka retirement account) knowledge. If you have a retirement account now or may have one at a future job down the line – you need to see this one. Or if you're vegan. OR if you are one of my UK readers. Whatevz. Enjoy! ~ M$M
Saving for retirement is a lifelong commitment that shouldn’t be taken lightly. This is the monefication of your dedication to the work force and years of loyal service paying off in later years.
With that being said, since every penny placed into an account shows such commitment, shouldn’t anyone be able to spend those funds when and how they please? You won’t hear any argument from me, but realistically it might be hard to fully experience the best retirement possible if the funds aren’t there. Not to mention, the government will indubitably have a few choice words to say. Here’s how to know if, when, and why you should withdraw from any life savings account.
When Can I Take Advantage of My Benefits?
If you happen to live in the US you are allowed to start withdrawing from your retirement fund by the age of 59 ½. Each retirement account is a little different, but typically 401(k) accounts require that an account member must leave their job after the age of 55 in order to have proper access to their money. IRA accounts insist on the age of 59 ½ . Nevertheless, as long as you wait until this age, a fee will not be associated with your deduction. Although, some folks may want or need these early payments for specific reasons.
In most cases, withdrawal before the correct age will land you a huge tax debt, but early retirement fund usage for things like medical expenses, health insurance, repaying college costs, a first home purchase, disability needs, and active military service do not incur a fee whatsoever.
In the UK, similar but different flexible retirement accounts are available – actually three systems to be exact. No matter which one you decide to go with (if you decide to choose a flexible withdrawal account) the funds are all still taxable. The first option is a lifetime annuity retirement account, which is basically what most folks in the US and UK receive for retirement. This account pays out a lump sum each year to the retiree. The next choice is a flexi-access drawdown, which acts just like a normal bank account. In this scenario, retirees can remove as much money from their pension at any time. Lastly, there is a lump sum payment alternative. You guessed it, the account owner can withdraw the entirety of their pension and spend it any way that they please.
How Much Tax Are We Talking?
Now, the issue with these flexible account options is the exorbitant amount of tax deduction that occurs when money is removed from the account. In the UK, people may take out funds from their accounts, up to about 43,000 pounds, and will be taxed the base amount of 20% for early subtraction. Anything from 43,000 to about 100,000 pounds is subject to a 40% tax debit. Finally, an early withdrawal of more than 100,000 pounds will result in a devastating 45% taxation.
Very few pension, 401(k), or other retirement accounts in the US, allow for this type of financial behavior. Accounts that do allow early withdrawal usually charge at least a 10% tax fee for early usage of retirement funds. However, many states have raised that fee to 20% on every withdrawal or more (my state of Idaho does charge 20%). Some states will charge a small amount up front with the withdrawal and others will charge none. So, when you’re completing your taxes after a retirement deduction you will need to remember this information. If you don’t pay taxes on it up front or if you don’t pay enough taxes (in the eyes of the federal government) you may see a hefty charge around the same time as your taxes are due, if you live in the US.
After the age of 70 ½ , most retirement accounts employ a mandatory withdrawal from retirement accounts every year. This means that if your account has seen an early withdrawal before this time, it might seem like your account is now being shorted in funds. The percentages will differ depending on how much is actually in the account(s), but it’s usually anywhere from 2% and up. Of course, this money doesn’t necessarily need to be spent. It can be withdrawn and saved, but again if money was taken out at an earlier date you might be in a position where you want to make your money stretch over the next 30 years of your life.
All in all, saving your money for as long as you can is undoubtedly the way to go. In order to receive the maximum benefit from years of hard work and saving, retirees should hold off on any type of early withdrawal from their accounts. Of course, this isn’t always possible in every situation. So, finding a retirement account that best works with both your financial situation and retirement goals is absolutely imperative for the comfortability of any retiree. What’s more, if you aren’t already contributing to a retirement plan, there is no better time to start thinking about a 401(k) or IRA plan. Deciding to sacrifice a few dollars from each paycheck dulls in comparison to sipping drinks in Hawaii when you hit that glorious age of 60.
Are you contributing to a retirement plan yet? What kind are you using? Did you at least like the old people pictures?!? 🙂