5 Perfectly Legal Ways You Could Use Your Retirement Savings Early

By Markets Fool.com

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Source: wikipedia

As the term suggests, retirement savings are generally used once you reach retirement age -- which the IRS defines as 59 years or older. However, there are some special circumstances under which you might be able to use money in your retirement accounts early, and without paying an early withdrawal penalty. Some of these are specific to either a 401(k) or IRA account, and others apply to any retirement account.

Buying a new home
This is a benefit for traditional IRA account holders. The IRS allows up to $10,000 in penalty-free withdrawals from your traditional IRA to be used toward a first-time home purchase.

The definition of "first-time home purchase" for the purposes of this withdrawal exemption is rather broad. The homebuyer cannot have owned a home within the past two years, and the money must be used to buy a home within 120 days of being withdrawn.

The home doesn't have to be yours. You can use the money to help your child, grandchildren, spouse, or parents buy a home if you so choose. However, the $10,000 limit is a lifetime maximum. In other words, you can't buy one house, sell it, and then take out another $10,000 to buy another home several years later. Nor can you take out more than one $10,000 withdrawal to purchase homes for several different people.

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However, if you're married, your spouse also qualifies for his or her own exemption. You and your spouse can withdraw up to $20,000 penalty-free toward the purchase of your first home.

Finally, note that you'll still be subject to income tax on the withdrawal amount, since traditional IRA contributions are made on a tax-deferred basis.

Roth contributions can be used anytime
You might be wondering why Roth IRAs weren't mentioned as being eligible for the homebuyer's exemption. Simply put, it's because contributions to a Roth IRA are eligible to be withdrawn without penalty at any time for any reason.

This is because Roth IRA contributions are made on an after-tax basis (you already paid income tax on your contributions), so it's already your money to do with as you please.

Bear in mind, though, that you can only withdraw your original contributions, not any investment gains. So, if your Roth IRA is worth $90,000 but you've only contributed $50,000, make sure you don't withdraw any more than that amount or you'll face an early withdrawal penalty.

Losing your job close to retirement age
The IRS refers to this as being "separated from service," and it applies to 401(k) and 403(b) plans -- not to your IRA. If you lose your job for any reason after your 55thbirthday, including termination, resigning, or early retirement, you can access the funds in your account without worrying about paying a penalty.

Or, if you are separated from service at any age and agree to receive "substantially equal periodic payments" over a period of time based on your life expectancy, the same exemption from the penalty applies. The payments must last for at least five years or until you reach the normal minimum retirement age (59 1/2), whichever comes first.

Disability or other hardship
If you become permanently disabled, you can withdraw money without penalty from any of the cited retirement account types. Additionally, if you have nonreimbursed medical expenses that make up more than 10% of your income, you can withdraw money to pay for those costs.

Sending your kids to college
If you withdraw money from your IRA to cover qualified higher education expenses, you won't be subject to a penalty. Expenses that count as qualified include:

  • Tuition
  • Fees
  • Books
  • Supplies and equipment required for attendance
  • Room and board for students attending at least "half-time"
  • Expenses for special needs services (if needed)

Important things to keep in mind
One important fact to remember is that if you take any kind of withdrawal from a non-Roth retirement account, the amount of the withdrawal is subject to income tax. This is particularly important to plan and account for if you take a large withdrawal, such as the $10,000 allowed for a first-time home purchase. This can add several thousand dollars to your tax liability, so be sure to plan for it.

In the end, it's usually still a good idea to leave your retirement accounts alone if possible. The tax benefits of retirement accounts are one of the best financial tools available to savers, and withdrawing your money too early can have a large negative effect on your savings once you actually reach retirement age.

The article 5 Perfectly Legal Ways You Could Use Your Retirement Savings Early originally appeared on Fool.com.

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