Get Money You Need Without Paying Penalties

In these trying economic times, more and more people who need money are looking to sources such as their retirement accounts. Generally speaking, if you withdraw money from a traditional individual retirement account (IRA), 401(k) or other qualified retirement plan before age 59½, you are subject to a penalty. Early withdrawals carry a 10 percent federal penalty and a 3.3 percent Wisconsin penalty. The money is also considered taxable income

Before taking that hit, consider these options.

Tap your Roth IRA or Roth 401(k). This is one of the easiest ways to get at retirement funds because you can make withdrawals of contributions (but not earnings), without paying penalties or taxes since contributions are made with after-tax money. But be aware that the long-term impact of raiding your Roth can be significant since you won’t have as much money growing tax-free for years.

Take out a 401(k) loan. Most 401(k) plans and several other types of employer-sponsored plans allow investors to borrow up to half of the vested balance in their account, up to $50,000. Terms vary, but most require borrowers to repay the loan within five years. Those who use the money to buy a home may get a longer repayment period. Plus, the 401(k) loan typically requires no credit check, minimal paperwork, and borrowers often get a better interest rate than at a bank.

Use one of the exceptions to penalties. There are a bunch of them.

You can, for example, take regular distributions from an IRA, 401(k) or other retirement account. This is the most commonly used option. You are permitted to make regular withdrawals of equal annual amounts over your remaining life expectancy without paying the penalty. You must take these payments at least once a year for a minimum of five years or until age 59½, whichever is longer.

Other exceptions include:
•  Becoming totally and permanently disabled.
•  Being in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
•  Being required by court order to give the money to your divorced spouse, a child, or a dependent.
•  Being separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.