The earlier you start the easier it is

Do you know enough about retirement? Even if retirement is a half a century away, having a retirement plan early on makes things a lot easier when it comes time to hang it up.

Take our short quiz to figure out if you know some important retirement facts.

Is your money locked in your 401(k)?

Answer: False

Many 401(k) plans offer loans that can be taken out against your 401(k) balance. Specifically, these plans often allow you to take out to 50% of your balance up to $50,000 in a loan to spend on whatever you choose. Loans are charged an interest rate which must be paid in addition to monthly payments on the principal borrowed. Typically the repayment period is 5 years, but be sure to check your 401(k) custodian’s plan rules for exact details.

A couple house keeping notes: do not borrow money from your 401(k) if you are able to find the money somewhere else in your budget or there is a loan option with a lower interest rate or more favorable terms. Second, you should continue your regular contribution amount despite taking out the loan. Do not take out a loan then reduce your 401(k) contributions.

Contributing to a Traditional vs Roth IRA

Answer: False

Traditional IRAs do not require you to pay taxes upfront. However, that same money is taxed at your current income tax level once you begin taking money out or are forced to via Required Minimum Distributions (RMDs). Therefore, if you are making less money now than you will be when taking distributions, it makes sense to contribute to a Roth IRA where taxes are taken out immediately. This way, your tax rate is less than it will be in the future (barring an unlikely future decrease in tax rates), and you can withdraw the money after age 59 ½ without the threat of forced RMDs.

If you want a more in-depth look at IRAs please read our article: When to contribute to a Roth IRA vs. a Traditional

IRA Exceptions

Answer: E

“All of these are exceptions”

That’s right, all of them are qualified exceptions. Here’s the full list:

• Health Insurance Premiums

  • You are able to withdraw from your IRA tax-free to cover health insurance premiums provided the following qualifications are met:

    • You are unemployed and are receiving federal and/or state unemployment compensation for at least 12 weeks

    • You withdrew in the year or the year after you received unemployment

    • You withdrew within 60 days since being re-employed
      

• Permanent Disability

  • If you are permanently disabled and can no longer work, the IRS allows you to withdraw penalty-free. The money can be used for any purpose; however, you will want to show your plan administrator proof of permanent disability before completing the withdrawal
    

•  Higher Education Costs

  • Many expenses related to higher education for yourself, spouse, or child are tax-exempt. These include tuition, fees, books, room and board, and supplies for students enrolled at least half-time. The rules here are a little gray, so it is best to check with a tax professional before withdrawing.
    

• Inheriting an IRA

  • Inheriting an IRA is tax-exempt if it originates from a non-spouse, though the amount inherited must be included in your adjusted gross income (AGI)
    

• First-Time Home Purchase

  • You are able to withdraw $10,000 to buy, build, or rebuild a first home for a parent, grandparent, yourself, or spouse. However, you must meet the first-time homebuyer qualifications set by the IRS

  • If buying with a spouse, you can withdraw up to $10,000 each without penalty

  • The funds must be used to pay for qualified purchase and closing costs 120 days after receiving the money
    

• Adopt a Child

  • Legal adoptions qualify for an exemption as long as the withdrawal comes within the first year after the date of adoption. The withdrawal is capped at $5,000.
    

• Reservists called to Active Duty

  • Reservists called to active duty after September 11, 2001 are granted an exception provided that:

    • The call to active duty was for a period of more than 179 days

    • The withdrawal was taken from an IRA or from funds attributable to elective deferrals from a 401k or 403b or a similar account

    • The distribution was made after being activated to active duty and no later than the close of active-duty period.