9 Legal Ways to Use Your Retirement Savings Early

In most cases, your retirement savings is not permitted to be used until you reach, well, “retirement age” as defined by the IRS. However, there are some notable exceptions that can allow you to use your retirement savings penalty-free, even if you’re much younger.

Here’s a rundown of some of the common early withdrawal exceptions and what happens if you decide to withdraw your retirement savings early if you don’t qualify for one of them.

What is “early” anyway?

Generally speaking, if you tap into your retirement savings after you reach the age of 59 1/2, you won’t be assessed a penalty. For all of the major types of retirement plans — IRA, SEP, SIMPLE IRA, 401(k), 403(b), 457, and others, this is considered to be the acceptable age for withdrawals.

It also is important to point out that this age threshold applies regardless of whether you’re working or not. For example, if you’re still working but withdraw $10,000 from your traditional IRA at age 60, it completely is allowable.

So an “early” withdrawal from your retirement savings is defined as one that takes place before you turn 59 1/2 years old. Unless you qualify for an exception, taking an early withdrawal from retirement savings is subject to a 10% penalty from the IRS.

With that in mind, the exceptions available depend on whether you have your retirement savings in an IRA or in a qualified retirement plan like a 401(k).

If your retirement savings are in an IRA

The early-withdrawal exception rules for IRAs apply to traditional and Roth IRAs, as well as SEP-IRAs, SIMPLE IRAs, and SARSEP plans. If your retirement savings are in one of these types of accounts, you can use your money penalty-free for the following reasons:

  • To pay for qualified higher-education expenses — for you or someone else, such as your child.
  • To pay toward a first-time home purchase either for you or your spouse, child, or grandchild, with a maximum of $10,000.
  • To pay health insurance premiums while you’re unemployed.

In addition, there’s a Roth-specific exception. In a Roth IRA, you have the ability to withdraw your original contributions (but not any investment gains) at any time and for any reason. For example, if you’ve contributed $20,000 to a Roth IRA over the past decade and your account is now worth $35,000, you can withdraw as much as $20,000 penalty-free, even if you don’t qualify for one of the other exceptions.

If your retirement savings are in a 401(k) or other “qualified” retirement plan

Unfortunately, if your retirement savings are in a 401(k) or other type of qualified retirement plan like a 403(b) or 457, you can’t use the exceptions for college expenses or first-time homebuyers. However, there’s one major exception you can potentially use that IRA owners cannot: If you’re 55 years old or older (50 or older for public safety or political employees) and no longer working for the employer for whatever reason, you qualify for the “separation from service” exception and can access your retirement savings penalty-free.

Exceptions that apply to all retirement accounts

Finally, there are some early withdrawal exceptions that apply regardless of the type of retirement account. Specifically, you can withdraw early from your retirement savings:

  • To pay unreimbursed medical expenses in excess of 7.5% of AGI.
  • If you become totally and permanently disabled.
  • If you agree to take the withdrawals as a series of “substantially equal payments” that last for at least five years or until you reach age 59 1/2, whichever comes later.
  • If you’re a military reservist called to active duty.

What if you don’t qualify for an exception?

To be clear, you have the ability to withdraw your retirement savings whenever you want, provided that your plan allows it. (Note: Qualified plans like 401(k)s aren’t required to allow so-called “hardship” distributions, although most do.) In other words, I’m 36 and have the ability to withdraw money from my traditional IRA right now if I want to. However, I’d have to pay a 10% IRS penalty for the withdrawal, and that’s on top of the income tax I’d have to pay, as well.

In rare circumstances, it can certainly make sense to withdraw money from your retirement savings even if you don’t qualify for an exception (say, if you’re behind on your mortgage and are about to lose your home). Just be aware that this option can be quite costly, so it should generally be used as a last resort.

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