Early Withdrawl

Dip into your 401(k) funds penalty-free

during the previous two years.

As for Roth IRAs, exceptions to the 10% penalty “that apply to traditional IRAs also apply to Roth IRAs,” says Slott. “If you withdraw money from a Roth IRA before 591/2 for other reasons, you’ll owe the penalty on the amount that’s attributable to your earnings inside the Roth IRA, but not to your original contributions.”

But before you touch one penny of your retirement stash prior to your golden years, check with a financial advisor to make absolutely sure your situation qualifies for an exemption from the 10% penalty.

In general, if you pull money from your retirement plan before age 591/2, you’ll get socked with a 10% early withdrawal penalty and you’ll have to pay taxes to boot. But there are exceptions, some of which apply to all plans-like an IRA, 401(k), 403(b), or Keogh-and some of which apply only to employer-sponsored vehicles.

Substantially equal periodic payments. Section 72(t) of the Internal Revenue Code allows you to withdraw money from your retirement plan on a regular basis. The calculations for these withdrawals must be based on your life expectancy to avoid the penalty. For example, if you’re expected to live another 30 years, you’d calculate 1/30th of your plan balance and withdraw that much each year. Two other methods of figuring out these elections are amortization and annuitization.

Death. If someone dies and names you as the beneficiary of a retirement plan, you can withdraw the funds no matter what your age.

Disability. If you’re severely injured and can’t work, you can get money from your plan. This applies whether you’re receiving disability checks from Social Security or from a disability insurance policy.

Medical expenses. You can withdraw money if the funds are used to pay medical expenses that exceed 7.5% of your adjusted gross income.

Separation from service. If you retire or change jobs, you can withdraw money if the separation occurs during or after the year you reach age 55.

Qualified domestic relations orders (QDROs). If you get separated or divorced, a portion of your or your spouse’s retirement plan can be transferred to another plan, as part of the terms of a settlement. A QDRO is an order to effect that transfer.

First home purchase. You can withdraw up to $10,000 for a first-time home purchase. To qualify, you cannot have had an ownership interest in a residence during the previous two years.

Health insurance. If you are out of work for at least 12 consecutive weeks, you can take out enough money from your IRA to keep your health insurance plan in force for 60 days, and keep doing so until you’re back to work.

Higher education. Distributions from IRAs can be used to pay post high school expenses such as tuition, room and board, books, fees and supplies.

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