Early Withdrawals From Retirement Savings Accounts

When you first began saving for retirement using tax-deferred retirement plans, you should have been informed that you would be subject to a penalty for withdrawing any funds before age 59 ½. However, under the following circumstances you may be able to withdraw funds without paying a penalty:

Death. Your beneficiaries can take distributions from your IRA account if you die before age 59 ½. These distributions will be subject to annual required minimums.

Disability. Depending upon your specific condition, you may be able to take penalty-free distributions if you are disabled.

Home purchase. IRA rules provide for a one-time withdrawal of 10,000 dollars to use as a down payment on a home purchase.

Medical care. Under employer-sponsored retirement plans, you can withdraw funds to cover medical expenses (the exact amount is subject to the rules of your plan). With an IRA, you can withdraw any amount paid for unreimbursed medical costs once the expenses exceed 10 percent of your adjusted gross income (AGI) for the year. If you are over 65, you can withdraw any amount which exceeds 7.5 percent of AGI.

Medical insurance. If you lose your job, you can withdraw IRA funds to cover the cost of medical insurance.

College Tuition. If you need to pay for college tuition for yourself or dependents, you can withdraw funds from your IRA. However, there are usually better ways to fund an education, and it’s not generally a good idea to dip into retirement savings.

Part of a SEPP plan. Withdrawals are allowed if they are part of a Substantially Equal Periodic Payments plan, which schedules payments over the term of your life span (or combined life span of yourself and your spouse). However, if you change the payment schedule after beginning payments, you could be subject to the 10 percent penalty.

Reduce excess contributions. Sometimes you may contribute more than the annual limit. You may be able to withdraw that amount without penalty, according to the rules of your plan.

Reduce excess elective deferrals. Under employer-sponsored plans, you may be able to withdraw any amount you previously deferred over the allowable limit.

Qualified Domestic Relations Order. Under a QDRO, your employer-sponsored plan may make payments to an alternate payee.

The rules for early withdrawals can be different, depending upon whether you have an IRA or an employer-sponsored retirement plan. Either way, early withdrawals should be considered very carefully, as they impact your future retirement income. It’s usually best to avoid early withdrawals if at all possible, and fund things like home purchases and college education from some other source.