No one likes the idea of having to access money set aside in their 401K plan or IRA to cover living expenses. We set these funds aside and invest them to fund retirement, but occasions do arise where people need to use some of the money from their retirement account. A recent survey found that 18% of Americans have had to make early withdrawals from retirement accounts during this recession. If you find yourself in this situation, there are ways to minimize the damage you cause to your long term financial future.

1.       Know The Exceptions: Most retirement accounts will charge a 10% penalty for withdrawals taken before age 59 and a half. However, there are exceptions to these rules that you may qualify for. Some of the more common exceptions include money for first-time homebuyers, qualified education expenses, and even medical expenses. Talk to an accountant or financial planner to see if you qualify for any of the IRS exceptions.

2.       Pay the Money Back: If you have to take a withdrawal from an IRA to cover short term costs, you have 60 days to repay the withdrawn amount before the IRS penalty becomes a factor. Just make sure that you have the discipline and the means to put the money back into the account if you’re planning on taking advantage of this rule.

3.       Take a Loan: You have the ability within most 401K plans to loan yourself funds and pay them back over time. The nice thing about a loan from a 401K is that the money is not taxable. It must be paid back, however, and if you leave the employer before repaying the loan, it must be repaid immediately or it does become a taxable event.

4.       Start an Income Stream: One way to avoid the 10% penalty on IRA withdrawals is to agree to equal periodic payments that are based on your life expectancy. This is a good option for people nearing retirement age who need small amounts from their IRA to supplement other income.

It’s always best to leave your retirement funds sitting in accounts to be used later in life, but if you have to take money from these sources, hopefully these tips will help avoid some of the costs and penalties associated with early distributions from retirement accounts.

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Tags: 401k Loan, IRA, retirement

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