It is important to note that if you are going to take money from retirement, there will almost always be a penalty, and there will definitely always be the requirement to pay income tax. This is why it is advised by financial experts across the board to only look to take money from retirement as a last resort. If you are under the age of 59 ½, you will most likely be fined a 10% early withdrawal penalty on top of your regular income taxes on the amount you withdrew. These fees were created in order to discourage people from trying to withdraw their retirement savings early so as to set themselves up for a relaxing and comfortable retirement.
If you have determined the type of withdrawal, you are eligible for and want to make, you can fill out the required paperwork and submit all documents required. This paperwork varies depending on who your employer is and the reason you are withdrawing. If you have a 401(k), the best way to begin the withdrawal process is to contact your plan administrator to determine how you will take your distributions. There are different options for how to take your distributions: an annuity, [non]periodic withdrawals, or a lump sum.
Depending on your situation, your plan administrator will be able to help you by letting you know which options will be available to you. Once you submit all of these documents, you will need to fill out the necessary paperwork and provide the requested documents. The paperwork and documents will vary depending on your employer and the reason for the withdrawal, but when all the paperwork has been submitted, you will receive a check in the mail for the requested funds, or the money will be sent to your bank account via direct deposit.
If you have a Roth IRA, your path to making money from retirement is way simpler. In fact, you can withdraw your contributions to your Roth IRA at any point. If you are below the age of 59 ½, however, you will still be paying all your regular income taxes plus the 10% penalty. Typically the funds will be deposited directly to your bank account, or your plan will be able to mail you a check.
How to withdraw money from a retirement account early, without penalty
If it seems like 10% is a lot of money to fork over for withdrawing money from your situation, that’s because it is. If you are looking to withdraw money from a retirement account early (but without penalty), there are a couple of options you may be eligible for.
There is always the hardship distribution option if you are in a difficult situation and see withdrawing money as your only option. According to the IRS, a hardship distribution is a “withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.” This option is put in place to help in extremely difficult situations that are obviously out of the control of the borrower. Borrowers are able to withdraw the retirement money without an official penalty, but they are still required to pay the regular income tax on the money withdrawn.
If you think you may be in the place to be qualified for hardship distributions, read through the following guidelines provided by the IRS to learn more. According to the IRS, an employer may determine that the borrower has an immediate and heavy financial need based on all relevant facts. The circumstances always vary, of course, but can be determined based on the following general guidelines.
Consumer purchases (such as a boat or television) are generally not considered an immediate and heavy financial need. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
A distribution is automatically considered to be necessary to satisfy an immediate and heavy financial need if all of the following requirements are met:
The distribution isn’t greater than the amount of the immediate and heavy financial need, including the amounts necessary to pay any taxes resulting from the distribution.
The employee has obtained all other currently available distributions (including distribution of ESOP dividends under section 404(k), but not hardship distributions) and nontaxable (at the time of the loan) plan loans, including all other plans maintained by the employer.
The employee isn’t allowed to make elective deferrals to the plan for at least six months after the hardship distribution.
If, after reading through some of these guidelines, you think you may be eligible to withdraw money from a retirement account early, you can submit the required paperwork, depending on your employer and situation, and begin the next steps.
In addition to the hardship distribution option, the IRS actually permits withdrawals without a penalty for certain specific uses unrelated to hardship. Some of these specific uses may include covering college tuition, paying the down payment on a first home, or adopting a child. These exceptions are exempt from the 10% penalty on most withdrawals, but you will still need to pay the regular income taxes. Like every other option, this is a case-by-case basis and requires paperwork and validation of its own.
Option to Borrow Against Retirement Account
If you are in a situation where you do not think withdrawing pre-fifty-nine-and-a-half-year-old will be an option for you, you can always borrow against a retirement account. Usually, it is a little easier and better to take a 401(k) loan than to withdraw money from a retirement account early. When you borrow against a retirement account, you are basically taking a loan from yourself and paying it back over time with a payroll deduction. This loan allows you to replace the money over time through payments coming straight from your paycheck without losing a portion of your investment account forever—as you would with a traditional withdrawal.
Think of it as a personal loan, but from the money you already have and with a very controlled method of paying it off. Not all plans offer loans, however, and not everyone is eligible for loans in the first place. Regardless, burrowing against a retirement account is definitely a solid option if you are not qualified to make money from retirement at this point. If you do not want to borrow against your retirement account, you may want to consider obtaining a personal loan elsewhere, such as your personal bank or a family member or friend who is willing to help you out.
As you can see, there are several different options for how to withdraw money from a retirement account early. You can apply to take money from retirement early and pay the hefty fees, choose to borrow against your retirement account so you can still get the money but pay it back over time, or in certain situations, you may just be qualified to withdraw your retirement funds without penalty at all. If any of these options seem like they may be fitting to your situation, contact your employer and set up a meeting to discuss further options.
If you are unsure of where to go from here, hiring a financial advisor is always an extremely wise and helpful option. Financial advisors can help you take an overarching look at every option you have, from taking from retirement early to burrowing against your retirement account or applying for a personal loan. There is always a way to get through the situation you are in, whether that means withdrawing money from retirement early or finding another more practical option.
