Help needed with early withdrawals (under 59) from retirement accounts

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rando348

Dryer sheet aficionado
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Hi Everyone

I’m in a horrible situation where my wife and I are splitting up. This forum has been so helpful in helping me set up my investments, so I really appreciate you all for your knowledge.

We are both 45 years old and own our own business. This year generated about 90K in income from the business.

Unfortunately, this was unplanned and we don’t have a lot of liquidity. We are in the process of selling our house (not sold yet) which we will end up keeping after all fees approximately 450K (so 225K each) but this will take several months to get the cash.

In the meantime, we need some short term liquidity of cash for the next few months just to survive find a new apartments, moving, etc.

Credit cards are near maxed so that’s not an option. There's also no one that can lend us the money either. :(

I’m thinking we will need about 40K but I’m not sure where to pull the money from.

Is it true I can take my contributions from the ROTH with no penalties? Would the traditional IRA be a better option to withdraw from and pay the penalty and taxes? What would you do with your back against the wall?

This is what we have in accounts
100K in husband Roth – Contributions were about 78K all has been there for over 5 years

30K in wife’s Roth – Contributions were about 23K all has been there for over 5 years

25K in a 457B - (wife no longer works for the state so no loans are available)

300K in Traditional IRA

I really hate that I have to do this and that I’m in this situation so please be kind.

There probably is not a right or wrong answer here so I’m looking for suggestions on what would be the least detrimental to us. If you need more info let me know

Thank you all in advance this whole thing really sucks. :(:(:(:(:(

Randy

EDIT: The house is in Puerto Vallarta Mexico so I can't take a HELOC unfortunately.
EDIT: We have no kids
 
Last edited:
I am sorry you and your DW are going through this.
Why would it take several months to get the cash from selling your house? I would think you would get the money fairly quickly after the sale. Will it take that long to be sold?

It is my understanding you can withdraw from a Roth if it has been funded for 5 years, but I am definitely not an expert on this.
 
pacergal said:
I am sorry you and your DW are going through this.
Why would it take several months to get the cash from selling your house? I would think you would get the money fairly quickly after the sale. Will it take that long to be sold?

It is my understanding you can withdraw from a Roth if it has been funded for 5 years, but I am definitely not an expert on this.
Click to expand...

Hi there. We put it on the market recently and there's plenty of people looking at it so it will take a couple months for the offer, closing, etc. I'll add this to my original post for clarity. Thank you
 
Take out a HELOC on the house, it will be paid back at the time of sale. This way your Roth money is preserved and while will pay interest, it's far less than the 10% penalty on IRA money.

<edit: cross post with OP update, being on market might make it harder, but could say HELOC is to update/paint stage house for sale, certainly don't mention divorce to bank, as not their business >

Realize your accounts will be somewhat equalized in the divorce.

Do you have kids ?
 
Sunset said:
Take out a HELOC on the house, it will be paid back at the time of sale. This way your Roth money is preserved and while will pay interest, it's far less than the 10% penalty on IRA money.

<edit: cross post with OP update, being on market might make it harder, but could say HELOC is to update/paint stage house for sale, certainly don't mention divorce to bank, as not their business >

Realize your accounts will be somewhat equalized in the divorce.

Do you have kids ?
Click to expand...

Great option and I wish I could but the house is in Puerto Vallarta Mexico so no HELOC available.

No kids
 
I would suggest that you each take contributions out of your Roth. If the proceeds from the sale of the house comes through or you find another option within 60 days then you can put it back in the Roth as a rollover contribution.

Alternatively, talk with a bank about a personal loan if your credit history is good. Do you have vehicles that don't have loans on them that can be used as collateral? Jewelery?
 
pb4uski said:
I would suggest that you each take contributions out of your Roth. If the proceeds from the sale of the house comes through or you find another option within 60 days then you can put it back in the Roth as a rollover contribution.
Click to expand...
+1
Also, you do not need to take all $40K out at once. You could take out $10K to cover immediate needs and withdraw more as needed. Once you get the money for the home sale, "rollover" the total amount that was withdrawn in the final 60 days. Money is fungible so the rollover funds do not have to be the actual withdrawn money.
 
To clarify, anyone can pull Roth IRA contributions at any time, tax-free and penalty-free. There is no 5 year rule there.

I still wouldn't do it. Once you take the money out of an IRA, you can't replace it (except for the 60-day rollover trick), and you lose 30 or 40 years of tax-free (or tax-deferred in the case of a traditional IRA) compounding on what you take out.

I highly recommend mediation. It's half as expensive, less stressful, faster, and more certain. We used an attorney mediator and it worked very well. Mediate an agreement first and then hire your own personal attorneys to review and advise you individually. Could save yourselves $10K or more this way.

Rather than borrow or withdraw from retirement assets, I would recommend you both get 40 hour a week jobs at $20 an hour (should be possible in Seattle if that's where you are). That brings in $80K a year. Do the business on nights and weekends, or do the $20 an hour jobs on nights and weekends.

Then move out and pay for the divorce as funds permit. If your $40K figure is real, that's about six months. If that's not fast enough for one of you, then that person can take the hit of withdrawing from their retirement funds.

I'm not sure if the state you're in is community property or not. That could matter in a divorce - if the "hurry up" person borrows on a credit card in a community property state, then in effect both parties pay half because the debt is community debt.
 
I would at least consider a 401k loan along with the other options.
 
pb4uski said:
I would suggest that you each take contributions out of your Roth. If the proceeds from the sale of the house comes through or you find another option within 60 days then you can put it back in the Roth as a rollover contribution.

Alternatively, talk with a bank about a personal loan if your credit history is good. Do you have vehicles that don't have loans on them that can be used as collateral? Jewelery?
Click to expand...

Thank you! The ROTH idea is good.

Unfortunately, we don't have any physical possessions worth anything no cars or jewelry. Just our retirement accounts
 
SecondCor521 said:
To clarify, anyone can pull Roth IRA contributions at any time, tax-free and penalty-free. There is no 5 year rule there.

I still wouldn't do it. Once you take the money out of an IRA, you can't replace it (except for the 60-day rollover trick), and you lose 30 or 40 years of tax-free (or tax-deferred in the case of a traditional IRA) compounding on what you take out.

I highly recommend mediation. It's half as expensive, less stressful, faster, and more certain. We used an attorney mediator and it worked very well. Mediate an agreement first and then hire your own personal attorneys to review and advise you individually. Could save yourselves $10K or more this way.

Rather than borrow or withdraw from retirement assets, I would recommend you both get 40 hour a week jobs at $20 an hour (should be possible in Seattle if that's where you are). That brings in $80K a year. Do the business on nights and weekends, or do the $20 an hour jobs on nights and weekends.

Then move out and pay for the divorce as funds permit. If your $40K figure is real, that's about six months. If that's not fast enough for one of you, then that person can take the hit of withdrawing from their retirement funds.

I'm not sure if the state you're in is community property or not. That could matter in a divorce - if the "hurry up" person borrows on a credit card in a community property state, then in effect both parties pay half because the debt is community debt.
Click to expand...

Going back and working a bit....that's something to think about. Thank you for your opinion I hadn't thought about that. :)
 
N02L84ER said:
+1
Also, you do not need to take all $40K out at once. You could take out $10K to cover immediate needs and withdraw more as needed. Once you get the money for the home sale, "rollover" the total amount that was withdrawn in the final 60 days. Money is fungible so the rollover funds do not have to be the actual withdrawn money.
Click to expand...

Thank you this is an excellent strategy, just taking it out a little at a time. I've been all over the place mentally so I didn't even think of that. So thank you!
 
I don't understand, you say you have a business that brings in income, a house worth 500k, but zero liquid assets?


You don't have a lot of options. SecondCor has described the only viable option IMO. You have to make it work until you sell the place in Mexico. Good Luck...
 
ivinsfan said:
I don't understand, you say you have a business that brings in income, a house worth 500k, but zero liquid assets?


You don't have a lot of options. SecondCor has described the only viable option IMO. You have to make it work until you sell the place in Mexico. Good Luck...
Click to expand...

Yeah I don't understand how we got into this situation either. Thank you for your input.
 
Just a few thoughts..

Would lowering the price of the house make it more attractive to potential buyers and get a sale sooner?

Can you simply rent a locker and move your stuff from your home there in the meantime?

Presumably the business goes up in smoke with the divorce, rent a room from someone and get to work quickly to start earning money.
 
jazz4cash said:
I would at least consider a 401k loan along with the other options.
Click to expand...


This is a great idea. I took out a 401k loan when I remodeled my 1st house. I wouldn't withdraw funds from a Roth IRA, that would be my last option.
 
Dean56 said:
This is a great idea. I took out a 401k loan when I remodeled my 1st house. I wouldn't withdraw funds from a Roth IRA, that would be my last option.
Click to expand...

Unfortunately our IRAs are at Vanguard. They are traditional IRAs and I don't think I can take a loan.

Unless I'm wrong??
 
rando348 said:
Unfortunately our IRAs are at Vanguard. They are traditional IRAs and I don't think I can take a loan.

Unless I'm wrong??
Click to expand...

You can't take a loan from an IRA. The other poster was advising against making a (permanent) withdrawal from your IRA. Most people here (including me) would strongly advise against a (permanent) withdrawal from your IRA.

There is a "trick" where you can get what is effectively a ~45 day loan from your IRA by starting an indirect rollover and then returning the funds to the original IRA. But this is both tricky and very short term, as well as costly from a tax perspective if you don't do it successfully, so it's risky. I would advise against this trick, especially since your life is currently tumultuous and uncertain and you don't seem familiar with the idea - it has a very very high risk of blowing up on you and not helping you.
 
You can only do one rollover per 12 month period for a traditional IRA, but I think you are allowed multiple on a Roth. Would this method work to end up with no reduction in the Roth?
The first time you take $X.
The 2nd time (within the 60 day period) you withdraw twice as much, $2X, but then you rollover $X back into the Roth.
The third time you withdraw $3X, but then you rollover $2X back into the Roth.
The next time you withdraw $4X and rollover $3X.
You keep repeating this until the home sale closes and you rollover the last withdrawn amount.
 
I have more than once suggested using a Roth as an emergency fund.
See https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund


If you do not have an emergency fund in a bank account, I'd probably take your contributions back out of your Roth, and use that to fund your emergency. Keep emergency expenses as low as possible.



If you are lucky the house will close in time to "rollover" back into the Roth. If not, just start contributing to it again.


Best wishes.
 
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