Taking Your Money Out Before the Law Allows

When you invest in a tax-deferred retirement plan such as a traditional IRA or a 401k, you receive a significant tax advantage. 

You do not need to pay tax on your investment gains until you reach retirement. In exchange for giving this benefit, the IRS restricts your access to your funds before retirement. If you want to take money out of a retirement plan before age 59 1/2, the IRS charges you a 10-percent penalty on your withdrawal. 

There are only a few exceptions that let your take out your money before the age limit set by the IRS.

Instructions

1. • 1
     Request an early withdrawal because of a disability. If you are permanently disabled, you do not need to pay the withdrawal penalty.
   • 2
     Demonstrate medical expenses that exceed 7.5 percent of your adjusted gross income. This includes the cost of medical care and health insurance premiums. You can make penalty-free early withdrawals to pay medical expenses that exceed this limit.
   • 3
     Apply for substantially equal periodic payments from your retirement plan for the rest of your life. If you apply to spread your account withdrawals equally over the rest of your life, you are not charged the penalty.
   • 4
     Use the withdrawal to pay for your first home purchase or for higher education expenses. This exception only applies to IRA early withdrawals.
   • 5
     Leave your job at age 55 or later. You can start making penalty-free 401k withdrawals at age 55 if you are no longer working at the company sponsoring the plan. This exception does not apply to IRAs.
   • 6
     Take out a loan from your 401k account. You can borrow up to $50,000 from your 401k. The loan must be repaid, with interest, within five years or the IRS considers the loan a withdrawal. Not all 401k plans allow loans. Check your plan details with your plan administrator. IRAs never offer plan loans.