You can withdraw money from your retirement plans at any time.You don't want to withdraw from these accounts early because they were created to provide you with income after you stop working.Incentives and tax breaks for people who save for retirement can come back to haunt them if they withdraw money early.If your reasons for withdrawing funds early don't fall into one of a few limited exceptions, you will have to pay income taxes on the funds you withdrew as well as an additional 10 percent tax.
Step 1: You should check the types of plans you have.
There are limited exceptions that allow you to withdraw retirement funds early without a tax penalty, but many of these exceptions only apply to money held in particular types of accounts.The earliest age at which you can withdraw retirement money without penalty is determined by the type of plan you have.Employee stock ownership plans are not subject to early withdrawal penalties.Unlike traditional retirement plans, the dividends from these plans are penalty-free.Many exceptions, such as withdrawing money to purchase your first home or to pay for college expenses, only apply if you have a traditional IRA.The same exceptions that apply to traditional IRAs are also used to open a Roth IRA that has been open for less than five years.If the withdrawal constitutes a return of your regular contributions, you don't have to pay income taxes on it.The IRS requires you to take your regular contributions, conversion contributions and earnings first.
Step 2: Evaluate why you need to withdraw early.
You can withdraw retirement money early without paying taxes on it, if you choose to do so in certain situations, such as disability or extensive medical bills.If you have medical expenses that exceed 7.5 percent of your adjusted gross income, you can withdraw retirement money to pay them.The exception is set to end on December 31st.This exception only applies to expenses that would be tax-deductible and you must pay them in full.If you withdraw more money than is necessary to cover tax-deductible medical expenses, you may have to pay 10 percent additional tax on the excess funds.If the court has entered a qualified domestic relations order, you can pay child support or alimony from your retirement funds.This exception does not apply to early withdrawals from an IRA.You can withdraw up to $10,000 from a traditional IRA without penalty if you want to purchase your first home.If higher education expenses are paid for your own education or on behalf of your spouse, child, or grandchild, you can withdraw money from an IRA early.
Step 3: Consider your age.
Even if you're still working, you can withdraw money from your retirement accounts without penalty.If you can structure substantially equal periodic payments, you may be able to withdraw from your retirement accounts at any age.People with IRAs and some other retirement plans can use substantially equal periodic payments to withdraw their retirement money early.If you have a 401(k) you must no longer work for the employer that sponsored the plan.If you've left your job, you can withdraw your money early without penalty.You don't have to retire permanently if you stop working for the employer that sponsored the plan.The age-55 exception does not apply to traditional IRA withdrawals.
Step 4: Documentation should be gathered.
If you have determined that one of the exceptions applies and you're eligible to withdraw retirement money early without penalty, you will need documentation to present to your financial advisor or plan administrator to prove that your reason for needing the money falls into that exception.If you're withdrawing funds to pay child support or alimony pursuant to a qualified domestic relations order, you must provide a copy of the court's order to the investment company that administers your account.If you need to withdraw money from your retirement accounts early due to disability, you must be able to prove that you are permanently and totally disabled to avoid paying additional taxes.Your disability must have been declared permanent before you could withdraw funds.
Step 5: Discuss your finances with your financial advisor.
Once you've made your final decision on the account from which you want to withdraw money, your financial advisor or plan administrator can assist you in filling out the documents you will need to set your plan in motion and get your money.Make your case to your financial advisor that you need to withdraw money from your retirement account early.Investment professionals usually advise against withdrawing retirement money early unless you have other options.An investment professional can assess and confirm that your situation falls into an available exception from the 10 percent early-withdrawal tax, as well as let you know what documentation you will need to prove that you're entitled to the exception.
Step 6: How much money do you need?
If you want to accomplish your goal, figure out how much you need to withdraw and don't take out more than that.You must pay an additional 10 percent tax for early withdrawal in limited situations.To qualify for a hardship withdrawal, you must fill out an application and be able to demonstrate immediate and severe financial need, and cannot withdraw any more money than is necessary to meet that need.
Step 7: Inquire with your financial advisor.
Your financial advisor or plan administrator can help you with the details of withdrawing money from your retirement account.You will have to pay regular income taxes and an additional 10 percent tax on any amount you withdraw early, according to your financial advisor.This can be a lot of money.Your advisor can help you explore other options that will allow you to meet the same goals without having to withdraw money from your retirement account.
Step 8: Determine the amount of the tax.
You should calculate the taxes you will owe on your withdrawal and understand how that will affect your budgeting for the year ahead.If there is an exception, you must pay taxes on the amount you withdraw as ordinary income.Your other income will be taxed at the same rate.Adding the amount you withdrew from any other income in the same year could result in a higher tax rate.You have to pay an additional 10 percent tax on the amount you withdrew if your situation doesn't fall into any of the limited exceptions.
Step 9: The money should be reported on your taxes.
If you withdrew money from your retirement plan, you have to report it to the IRS on Form 5329.The required form and instructions can be found on the IRS website.If you look over this form in advance, you can understand how an early withdrawal will affect your taxes.You have to report the additional tax on your Form 1040 if you fill out and file Form 5329.If you have questions or concerns, you may want to talk to a tax professional about withdrawing money from your retirement plan early so that he or she can provide an accurate assessment of your tax liability.
Step 10: There are options available.
Depending on the bank that administers the account and the type of account it is, you can't borrow funds in your retirement account.How old your account is and how much money you have in it may be a factor.Most investment companies that administer 401(k) plans offer access to loans.The fees and terms are different among companies.Review the terms for your retirement account's bank or investment company, and compare that to the costs of a traditional loan to see if this is a good option for you.
Step 11: Take the portion of your retirement funds you need to calculate.
You won't be able to borrow more than 50 percent of the total funds in a single retirement account, and you can only borrow from one account at a time.If your vested balance is less than $100,000, you can't borrow more than 50 percent of it.The maximum amount of a loan is usually $50,000 for banks and investment companies.You can request a loan for the maximum amount available on the loan application.If you request a loan greater than the maximum available, this can result in delays or denial of your application.
Step 12: You have to complete your application.
Although most investment companies don't run a credit check, you should fill out a paper application detailing the amount of money you want to borrow and the length of the loan.Loan request forms can be downloaded from the websites of investment companies.You are responsible for determining how much you can pay back and setting the term of your loan.This requires careful budgeting to make sure you can make your payments.The terms can be limited to a certain number of months or years.If you withdraw money to purchase your primary residence, Fidelity's loan application limits loans to 60 months.
Step 13: You will receive your funds.
You will receive a check from the investment company if your application is approved using the method you indicated.The default method of payment is to send a check to the address on file for your account.There may be an additional fee for expedited options.You can expect your check to arrive within seven days after your application is approved.
Step 14: Make your loan payments on time.
You will have to pay the money back with interest at regular intervals.Your payments will be credited back into your account.One of the benefits of borrowing from your retirement account is that you don't have to pay interest to a bank.You need to make sure you can afford the payments before you take out a loan.The amount you borrowed plus accrued interest will be taxed as ordinary income, and may also be subject to an additional 10 percent tax on early withdrawals.If you lose your job, many plans require you to pay back the entire loan within 60 days or the money must be taxed as a distribution and may be subject to the additional early-withdrawal tax.