“My retirement accounts are tax sheltered, so there’s nothing I need to worry about there, right?”
Just know that any early withdrawals from your accounts are subject to taxes and penalties. Here’s how that breaks down:
Traditional IRA: Any withdrawal you take before age 59 ½ is subject a 10% penalty in addition to regular income tax (to clarify, that’s your federal tax rate as well as any state income tax) on the withdrawal amount. The one exception is a freebie for first-time homebuyers- you can take up to $10,000 with no penalty if you put that cash towards a down payment or closing costs within 120 days of the withdrawal.
Roth IRA: No taxes on withdrawals from accounts you’ve held for a minimum of five years. Behold the benefits of our buddy Roth. Though it’s generally okay to tap into your Roth, if you take out more than your contributions and tap into your earnings before 59 ½, you’ll get hit with that same 10% penalty.
401(k) or 403(b): Like a traditional IRA, any withdrawal before age 59% is subject to regular income tax and that delightful 10% penalty.
529 & Coverdell ESAs: Because you fund these educational plans with taxed income, you won’t pay any tax on withdrawals. If you withdraw any earnings for non-educational purposes, (or in the Coverdell case, any withdrawals that exceed your educational expenses) you’ll pay… a 10% penalty. Big surprise, we know. Other surprise: depending on the state you’ve enrolled your 529 Plan, you might also be subject to state income taxes on those earnings.
And of course, you’ll need to file a tax form if you do take any withdrawals. What Uncle Sam is really saying through all this is, “Keep your damn hands off that account.”