Can You Take Out Retirement Money for Any Reason?
Whether you're investing in a 401(k) plan, individual retirement account or company-sponsored pension plan, you have provisions to tap into your savings before you reach retirement age. Usually, withdrawals are reserved for dire financial emergencies and sometimes come with a hefty tax penalty. Rules and restrictions vary by plan, so always check with your plan administrator or a financial adviser for your full list of options.
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401(k)
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Limited circumstances allow you to withdraw from your 401(k) account, in some cases without penalty. About 90 percent of 401(k) plans allow hardship withdrawals if you need money to escape eviction or foreclosure, cover funeral expenses, pay tuition or manage other financial emergencies, according to Bloomberg Businessweek. Often, you must demonstrate that you have no other financial resources to cover the emergency. The Internal Revenue Service charges you a 10 percent early withdrawal penalty on top of the taxes you owe, unless you have become permanently disabled or are facing exorbitant medical costs. Most plans also offer the more attractive option of a low-interest loan on a portion of your 401(k) funds; the loan is not subject to taxes and penalties as long as you do not default on it.
IRA
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IRAs, both the traditional pretax IRA and the after-tax Roth IRA, have fewer restrictions on early withdrawals than 401(k) plans, but you still might face a penalty. IRA's allow you to withdraw "substantially equal periodic payments," a penalty-free annual installment you can take regardless of your age based on the amount in your account and your life expectancy, as determined by the IRS. You also can withdraw money for college tuition for you or a family member or up to $10,000 towards the purchase of a first home without penalty. As with 401(k)s, disability or high medical bills also allow for penalty-free withdrawal. You still pay taxes on your withdrawal, with the exception of those portions of a Roth IRA on which you've already paid taxes.
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Pensions
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The rules for withdrawing from most pension plans are somewhat similar to those for IRAs, although your employment status also is a factor. As with IRAs, you can withdraw substantially equal period payments from your pension, but only if you no longer work for the employer that provided the pension plan, according to the AARP (American Association of Retired Persons). If your employer lays you off in the year you turn 55 or later, you also can withdraw from your pension without penalty. If your employer has a defined-benefit pension plan -- one that's a fixed benefit rather than reliant on contributions -- you probably will not be able to touch the money until you reach retirement age, even if you are laid off or quit.
Considerations
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Even if your circumstances allow you to withdraw retirement money without penalty, you should do so only as a last resort. Not only does your retirement account lose the money you withdraw, but you also permanently lose any interest or capital gains that money would have earned while in the account. Additionally, you might face new restrictions on rebuilding funds in your account, such as in the case of certain 401(k) plans that prevent you from contributing until a year after a withdrawal. Before making a withdrawal, carefully weigh whether the money you need now is worth a potentially significant drop in income when you reach retirement age and consider consulting a financial adviser.
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References
- Bloomberg Businessweek: Tapping Your 401(k) in an Emergency
- "USA Today": In a Terrible Bind? Tapping Your 401(k) May Not Be Smart
- Nolo: Getting Your Retirement Money Early -- Without Penalty
- The Motley Fool: All About IRAs
- AARP: Frequently Asked Questions -- Pensions
- U.S. Department of Labor: FAQs About Pension Plans and ERISA
Resources
- Photo Credit Roll of dollars in nest image by Mykola Velychko from Fotolia.com
