Planning for Retirement. Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. New Ventures. Search Search:. Updated: Nov 8, at PM. Author Bio Former college teacher. Textbook contributor. Personal finance writer. Passionate advocate of smart money moves to achieve financial success. Image source: Getty Images. One in 4 Americans who took early retirement withdrawals did so for medical bills or other unplanned expenses, according to Bankrate.
But her experience taught her to stay wise about money and to invest when she has the chance. She remains frugal, even after starting a successful business in that helps mothers start their own businesses from home. At 25, Wesley Cherisien was switching jobs. Instead, he used the funds for his new home and related expenses, which is not uncommon.
About 1 in 6 of those who take out early withdrawals do so for a new home purchase, according to the Bankrate survey, while 1 in 7 do so for home improvement and repairs. Cherisien regrets how much his balance could have compounded, so he takes steps now to avoid the same scenario.
As the owner of a consulting company , he determines what percentage of his monthly income goes to his IRA at the start of each year. Fortunately, you can avoid the penalties altogether in certain instances. They are:. Taking out a k loan may be a better bet because you must pay yourself back the full borrowed amount — plus interest. That can help compensate for what you miss out on compounding.
But there are some exceptions that allow for penalty-free withdrawals. If you do need to take a withdrawal, some hardship situations qualify for a penalty exemption from an IRA or a k plan, but note that penalty-free does not mean tax-free:.
In certain situations, a traditional IRA offers penalty-free withdrawals even when an employer-sponsored plan does not. We explain those situations below. Many do, but they may permit hardship withdrawals only in certain situations — for instance, for medical or funeral expenses, but not for housing or education purposes. The government will allow investors to withdraw money from their qualified retirement plan to pay for unreimbursed deductible medical expenses that exceed 10 percent of adjusted gross income.
You do not have to itemize deductions to take advantage of this exception to the 10 percent tax penalty, according to IRS Publication The IRS dictates that investors must be totally and permanently disabled before they can dip into their retirement plans without paying a 10 percent penalty. Rothstein says the easiest way to prove disability to the IRS is by collecting disability payments from an insurance company or from Social Security.
The caveat is that you must be unemployed for 12 weeks. To leave a clean trail just in case of an audit, Rothstein suggests opening a separate bank account to receive transfers from the IRA and then using it to pay the premiums only. When an IRA account holder dies, the beneficiaries can take withdrawals from the account without paying the 10 percent penalty.
Though you may take money out of your k to use as a down payment, expect to pay a 10 percent penalty. The penalty-free withdrawal is not limited to first-timers either. Homebuyers must not have owned a home in the previous two years, though. Similarly, withdrawals can generally be made from a k to cover higher education expenses if the plan allows hardship withdrawals, but they will be subject to the 10 percent penalty.
Section 72 t of the tax code allows investors to take money out of their retirement plan for income, but there are restrictions. The shortest amount of time that payments must be made is five years. For example, early retirees may want to tap their retirement accounts before Social Security kicks in.
These periodic payments can also be spread over the course of your life and that of your designated beneficiary. Tapping your retirement savings should only be used as a last resort. Here are some ways to avoid accessing your k or IRA early:. This should be the foundation of your financial plan and experts recommend having about six months worth of expenses saved. You can park this money in a high-yield savings account to earn more interest than you would in a traditional checking account.
Consider utilizing an introductory credit card offering that includes zero percent interest for a period of time. This could help you finance your spending needs immediately, but be careful not to let the balance carry over once the higher interest rate kicks in. Relying on your community for financial support during tough times can be a great way to make ends meet without going into debt or tapping retirement accounts. In most circumstances, taking an early withdrawal from your k or IRA will result in an additional 10 percent penalty on top of income taxes.
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