While taking money out of a retirement fund before age 59 1/2 is usually not recommended, in certain cases, it may be unavoidable, especially during times of economic crisis. If you need cash and have a retirement fund you can tap, here’s what you need to know.
Background
When retirement plans such as the 401(k) were introduced, company pensions were still the norm. Today, however, very few companies offer pensions anymore and most people rely entirely on social security and whatever savings they’ve accumulated in their retirement account to get them through their golden years.
For many people, retirement accounts are their most significant source of cash, but because they were created to help you save money for your retirement years, withdrawals before retirement age (59 1/2) are discouraged. In fact, early withdrawals from traditional and Roth IRAs are subject to an additional 10 percent tax, unless an exception applies. Exceptions to the additional 10 percent tax apply for early distributions include the following:
- Beneficiary or estate on account of the IRA owner’s death
- Totally and permanently disabled
- Distributions made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
- Qualified first-time homebuyer
- Qualified expenses for higher education
- Medical insurance premiums paid while unemployed
- Unreimbursed medical expenses that are not more than a certain percentage of your adjusted gross income
- Distributions due to an IRS levy of the IRA under section 6331 of the Code
- A qualified reservist distribution, or
- A qualified disaster distribution (certain rules apply)
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