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How to Access Retirement Funds Early, Without Penalty

by Caldwell Trust

It’s important to plan for retirement, but what happens if you need that money earlier? Accessing retirement funds before they reach maturity, without penalty, can be difficult, but it’s not impossible. In this post we’ll look at a few possible ways to access retirement funds early, without sacrificing your future.


Take Back a Roth Contribution

If you’re in a financial jam, taking back a contribution from your Roth IRA is a relatively simple way to access some of the cash you’ve been stashing for retirement. Since Roth accounts are funded with after tax dollars, the sum of your pre-earnings contributions can be withdrawn penalty free.


The downside here is that if you’re already maxing out your Roth account (which you should be), you can’t put it back into the account at a later date. Funds withdrawn from a Roth IRA that are less than or equal to the sum of your contributions remain classified by the IRS as “contributed funds.” You can not replace withdrawn funds in excess of your the yearly maximum contribution amount. If you’ve contributed more than the maximum, make sure to withdraw those funds ASAP, since they will be subject to a 6% penalty by the IRS.


Borrow From Your 401(k)

Most, but not all employer sponsored 401(k) retirement plans allow account holders to borrow money against the balance of their retirement account. Employees can borrow up to $50,000, or half of their total savings, whichever is less. Borrowing from your 401(k) can be advantageous to taking back Roth IRA contributions, because paying back this money does not affect your maximum contribution levels. But unlike a Roth this money must be paid back, with interest, typically within 5 years.


Borrowing from a 401(k) can be risky, however. Money that is not repaid within 5 years is then treated as an early disbursement by the IRS, making it subject to income tax along with a 10% penalty fee. Additionally, if you stop working for the company during repayment, and are unable to immediately repay, the outstanding balance can also be treated as a disbursement, and subject to the same penalties.


The exception to the 401(k) early disbursement penalty, is if you are over the age of 55 when you leave your job. In that case, money may be withdrawn from your 401(k) without incurring the 10% penalty. This is a few years earlier than with IRA and Roth accounts, which require that you be at least 59.5 years old to withdraw funds without penalty.


Pay for College With an IRA

The exception to early withdrawal penalties for traditional IRAs is if the money will be used to pay qualified higher education expenses for either yourself, your spouse, children, or grandchildren. IRAs are not counted as an asset when determining financial aid through FAFSA, so they can be a good way to save for your children’s education. The money disbursed for tuition payment however is treated as untaxed income when qualifying for the following year’s financial aid distribution.


There are some other disadvantages to this as well. Distributions from an IRA can only be used to pay for tuition expenses during the year funds are disbursed. Past, or future tuition payments can not be made in this way. And as with a Roth IRA contribution take back, funds disbursed can not be put back in, if you are already making the maximum contribution.


The decision to make an early withdrawal from a retirement account should never be taken lightly, but in circumstances where doing so is unavoidable, there are ways to get around the 10% early disbursement penalty imposed by the IRS. As with any major financial decision, it’s always best to discuss your options with a qualified professional first.  


About Caldwell Trust Company






Caldwell Trust Company is an independent trust company with offices in Venice and Sarasota, Florida. Established in 1993, the firm currently manages over $800 million in assets for clients throughout the United States. The company offers a full range of fiduciary services to individuals, including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers.


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