6 Ways to Make an Early, Penalty-Free Withdrawal From Your Retirement Fund

After years of contributions to your retirement fund, you may need to withdraw money to pay for an expense. Typically, withdrawals made from retirement accounts, e.g. a 401(k) or IRA, made before age 59 ½ are subject to a 10% early withdrawal penalty. There are some instances that you can take money from your retirement fund without having to pay the penalty. You may, however, still be subject to income taxes on the amount you withdrew.

Use it for Medical Expenses

You can withdraw from your retirement fund to pay for medical expenses that aren’t covered or reimbursed by your health insurance company. The total amount of the expense must not exceed 10% of your adjusted gross income and withdrawal must be made in the same year the medical expense occurred.

This exception applies to: Qualified plans like a 401(k), IRA, SEP, SIMPLE IRA, and SARSEP Plans

Pay Health Insurance Premiums After a Job Loss

You can make a penalty-free withdrawal from your IRA to pay health insurance premiums for yourself, your spouse, or dependent children if you lose your job and collect unemployment for 12 consecutive weeks. Unfortunately, this penalty-free withdrawal doesn’t apply to 401(k) plans.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Use It for Higher Education Expenses

You’re allowed to use retirement funds to pay for college-related expenses including tuition, fees, and room and board for yourself, your spouse, your children, or grandchildren. (Room and board only qualify for students who are enrolled at least half-time.) The early withdrawal must be used to pay for education expenses at a qualified institution to avoid the penalty.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Use it Towards Your First Home Purchase

You can withdraw up to $10,000 ($20,000 for couples) to use toward the purchase of your first home. The home purchase doesn’t have to technically be your “first” home purchase. The IRS only requires that you haven’t owned a home that served as your primary residence within the previous two years.

This exception applies to: IRA, SEP, SIMPLE IRA, and SARSEP Plans

Cover Expenses After a Disability

The IRS allows you to withdraw from your retirement fund without paying a penalty if you’ve suffered “total and permanent disability. You’ll have to provide documentation you’re your physician or insurance company to show you qualify.

This exception applies to: Qualified plans like a 401(k), IRA, SEP, SIMPLE IRA, and SARSEP Plans

Withdraw Any Excess You Paid

The law only allows you to contribute a certain amount to your retirement plan each year. If you mistakenly contribute too much, you can withdraw the excess without penalty. You have until the tax-filing deadline, usually April 15, to withdraw excess contributions from your retirement fund. Otherwise, you face tax penalties.

This exception applies to: Qualified plans like a 401(k)

401(k) Loan as an Alternative

If you need to make an early retirement account withdrawal that doesn’t meet any of the requirements to make a penalty-free withdrawal, you can take a loan against your 401(k) if your employer offers it. A few caveats: you must repay the loan within five years, you miss the opportunity to earn compound interest, and the full balance of the loan may be due if you leave your job before the loan is completely repaid.

Tax Implications

Make sure you consult with a tax professional to completely understand the tax implications of withdrawing from your retirement fund. Keep all your documents and receipts related to withdrawal and usage of the funds in case you need them for your tax return.

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