When Is It Permissible To Remove Money From Your Retirement Plan

When Is It Permissible To Remove Money From Your Retirement Plan

When you put money into your retirement plan, you rarely do so with the intention to remove it early. Most people understand that the longer they leave their retirement savings untouched, the better off they will be when their golden years at last arrive. However, life doesn’t always go the exact way that we plan for it to go and there are times when taking money out of your retirement plan may actually be the right financial move to make.

The question of when it is permissible, both legally and logically, to remove money from your retirement plan will depend on various factors. These factors include the type of retirement plan in question, how early you are removing the money, and the reason that you have for removing it. Let’s begin with the logical side of making the choice to remove funds from your retirement savings early.

Even if you can legally remove money for your retirement savings, that doesn’t always mean that it is logically permissible to do so. Remember, you put that money away for a reason: so you could live on it when you are no longer earning a wage. Removing money from your retirement plan should be something that you don’t take lightly.

In other words, think twice about removing money from your retirement savings to buy a luxury car that you otherwise couldn’t afford. Likewise, getting a hot stock tip and wanting to take a trip to Brazil are not logical reasons for wanting to dip into your retirement savings. However, there are some logically sound reasons that you may want to remove money from your retirement plan:

  • To use as a down payment to purchase a principle residence
  • To pay medical bills in the event of a serious illness or injury
  • To help pay for higher education for yourself or a child

Whether you have a traditional or Roth IRA (individual retirement account) or a retirement plan through your employer, there may be restrictions that govern how much you can remove and when. And of course, there are the penalties that you will incur when you remove money from your retirement fund early.

A 401k is an employer sponsored retirement savings plan. Employees can contribute pre-tax income and get tax free interest and employers often contribute by matching a small percentage of the employee’s contribution. You will not owe any taxes on your 401k until the time that you remove the money from the account. You can remove money from a 401k whenever you want to. However, if you plan on removing money from your 401k before the age of 59 and a half, be ready to pay the price. Unless you can prove that you need the money due to extreme hardship, you’ll probably end up paying a 10 percent penalty fee. Also, you’ll be charged taxes on the amount of money that you withdraw early based on your current tax rate.

If your retirement plan is an IRA, and you remove money from it before you are 59 and a half years old, then you will typically incur a 10 percent early distribution tax. This 10 percent tax will be on top of the money that you will owe in income taxes on the amount of the withdrawal. The good news is that there are times when you can remove money from your IRA without incurring the 10 percent penalty.

The first is when you are using the money to buy a first home or primary residence when you haven’t owned a home in the prior two years. If you are an individual you are allowed to use up to ten thousand dollars in IRA funds towards the purchase of your first home. Married couples may withdrawal up to twenty thousand without having to pay the early distribution tax.

The second instance in which you can take money out of your retirement IRA early without paying to pay the distribution tax is in order to pay for higher education costs. The higher education costs can be for yourself, your spouse, your children, or even your grandchildren.

There may be other instances in which you can escape all or part of the penalties placed on you for taking money out of your retirement plan early. Be sure to check the rules and restrictions of your particular plan before proceeding.