This past January and February I withdrew money from my Roth IRA. It was not a smart move, as I’m more than 20 years away from retirement age.
However, work had been extremely slow in the prior months. An occasional job or two or three would come in, enough to pay rent and some bills. But in January and February, I was down to the wire, nearly drained of savings and felt like I had no other recourse.
I looked at previous Roth IRA statements for 2013 and 2014, and saw my contributions amounted to just enough to support me for another one-and-a-half months. Over the next few days I struggled with this information and what it could do for me. On one hand, withdrawing early is clearly an unwise decision. The money is there for Future Me, a nice little nest egg for when I want to take vacations or lessons in Japanese or simply get by. Is 45 days of financial relief worth the loss? On the other hand, Present Me needed an injection of cash, and fast. I could always put the money back later. It seemed like the money simply sat there; while it was making investments for the future, I was hurting and needed an investment in me right now.
I did this once before, for an issue far less threatening: a couple of years earlier, I still had one last chunk of credit card debt to pay off from the recession in 2008. Then I would be debt-free (minus student loans) and finished with any lingering memories of 2008. Considering I also didn’t like the credit card company (Bank of America), I was even more eager to pay it all off.
I spoke with an adviser at the brokerage firm and discovered I could withdraw any amount totaling no more than my contributions over the years without paying penalties or taxes. For example, if I contributed $10,000 over the last ten years and withdrew the full $10,000 this year, I won’t be penalized. They would send me forms 1099 (because the withdrawal is considered income) and 5498 (to show my contributions, provided I made any). As long as I kept records of the contributions throughout the years, I would be in good shape should the IRS audit me. Come tax time, I also had to fill out form 8606, explaining I took out a contribution only, and then I didn’t have to pay taxes, either.
Any amount higher than the sum of my contributions is characterized as a “distribution” and this is where the penalties kick in: 10% on the extra amount, plus taxes. So if I withdrew another $1,000 in addition to the $10,000 mentioned above: the IRS will charge me $100 ($1,000 X .10 = $100), plus taxes because it’s considered income. There’s a loophole here, as well: it’s called a 60-day rollover, which means if I re-pay that $1,000 within 60 days of the initial withdrawal, I can avoid a penalty. You can only do this once every 12 months, and since this is an IRS rule, any brokerage firm should let you do this.
Even with all the loopholes and the relief I felt from paying off that debt, I still felt uneasy after withdrawing. I swore I’d never do it again. In the unstable world of freelancing or even with a full-time job, knowing you’re building a cushion to fall back in the future is a nice thought, a safe one.
And normally, I do have a safety net for the present, as well. I’m an ardent saver, habitually putting aside any where from 10% to 25% of each check directly into savings. How much I put aside depends on my financial situation at the moment in time. If I’m not carrying any credit card debt other than what I charge for my usual monthly expenses, then 25% is put aside. As a rule, I aim to keep three months’ worth of expenses in savings at all times, and only occasionally dip below that amount.
These were extenuating circumstances, however, and I was down to my last few hundred. Panic was beginning to set in – similar to what I experienced in 2008 – but this time I wasn’t going to steal milk or charge rent to my credit cards.
In the end, I justified the action by telling myself I would put the money back. It still was not my best move, and I’ve made quite a few financial mistakes; maybe 59.5 year-old me will have to skip those Japanese lessons, but 32 year-old me was able to go on for another 45 days.
What I need right now is to survive, and survive I will.