Sometimes, our clients, due to unexpected expenses, have made withdrawals from their retirement accounts before reaching the minimum age of 59 ½. This leaves them vulnerable to income tax and a 10% early withdrawal penalty on the amount withdrawn. While we strongly recommend that people not access their retirement accounts early, there are a few ways to do so that allow you to delay taxes and avoid the 10% penalty.
- Borrow the money from your retirement plan with a hardship loan. The loan is not considered income nor is it subject to the 10% penalty. You will pay interest on the loan, but the interest is going back into your retirement account.
- Take a hardship distribution from your IRA or other qualified retirement plan if circumstances meet the hardship exemption criteria. This will avoid the 10% penalty. While taking a hardship distribution from your qualified 401(k) plan is more difficult with fewer allowable hardship exemptions there are still ways to avoid the 10% penalty.
- When a hardship distribution from your 401(k) is not possible, rollover an amount from a 401(k) plan to a qualified IRA, and then take a hardship distribution.
Before making any withdrawals, contact both your employer and your accountant. Your employer can provide you with your various distribution options; while your accountant can help you take the option with the least taxes and penalties.