Generally, if you have a retirement account, you may not withdraw funds until you are age 59 1/2. Do so and you're subject to an IRS penalty of 10 percent and must pay ordinary income taxes on the amount of the withdrawal. Most financial advisers recommend against making a withdrawal of funds that are meant for retirement. But with passage of the 1997 Taxpayer Relief Act, the IRS has made five exceptions to the rules governing withdrawals from retirement accounts.
Take up to $10,000 from your IRA for the downpayment on a home if you're a first-time homebuyer or you have not bought a home for at least two years. If you are married, your spouse can do the same. You will have to pay ordinary income on the amount, or amounts, of your withdrawal. The same goes for a 401K plan, as long as the plan has such provisions and that you pay the money back in accordance with the terms set out in the plan agreement.
Borrow from your retirement plan if you run out of money, but there are IRS rules governing such withdrawals. You will be obliged to repay your retirement plan within 60 days to avoid the 10 percent penalty and the imposition of ordinary income taxes. Furthermore, you cannot make such a withdrawal more than once a year.
Withdraw without penalty from a retirement account for medical expenses for yourself or a dependent in excess of 7.5 percent of your adjusted gross Income. Also, if you must continue paying health insurance premiums because you are laid off from your job, withdrawals from your retirement account will not be penalized.
Tap your retirement account for college expenses of any dependent, and you can do so without penalty, as long as you pay ordinary income tax on the amount you withdraw. The amount of your withdrawal is limited by the charges for each year the student is in school.
Retire earlier than age 59 1/2, and you can make premature withdrawals from your retirement plan. The IRS requires that you make "substantially equal periodic payment," called SEPP, for at least five years or until you reach age 59 1/2. The amount of those payments is based on your life expectancy and is difficult to calculate, so it is best to consult with your financial adviser to avoid problems with it in the future.