Borrowing From Retirement Plan Early Without Penalty
While taking money out of your retirement plan early is never a good idea, there are circumstances in life that may require you to do so. Although many people believe they will pay a large penalty, there are some circumstances that will allow you to avoid a penalty:
You may borrow short term without penalty or immediate tax payment if repaid quickly. This can be a fast solution for emergencies, without incurring outrageous fees, costs, and the time plus stress of obtaining traditional loans. The rules are absolute and very strict, but if you fail to follow the rules, you will already know what the penalties and taxes are in advance. Keep in mind, those penalties and taxes must be paid separately, or incur additional costs.
Permanent Withdrawal Without Penalty
Taking money out of your 401(k) before you retire without penalty. A majority of 401(k) plans have exemptions that allow you to take early withdrawals without penalty. Those exemptions include:
Payment of medical expenses;
If you become unemployed and are between the ages of 55 and 59 ˝;
If you set up substantially equal periodic payments;
If you are taking dividend distributions from employer stock within an employee stock ownership plan (ESOP).
If your needs meet any of these criteria, you won’t have to pay early withdrawal penalties, but you will need to pay income tax on the withdrawals.
Taking money out of your traditional IRA before retirement age can be without penalty. There are several ways you can take money out of a traditional IRA before you are 59 ˝ without an early withdrawal penalty, including paying for college or buying a first home. Your estate planner can provide you with information on how to do this. However, you may still have to pay income taxes on the withdrawals.
Planning for retirement well in advance can also help you prepare better for any unforeseen circumstances.