It’s not uncommon for people to experience circumstances under which they feel the need to withdraw from their retirement accounts before reaching their retirement age. Early withdrawal from an IRA or 401(k) account typically results in hefty penalties, which makes this a less than ideal option. Generally, if you take a distribution from a qualified retirement account before age 59½, you will owe federal income tax, state income tax, and a 10% penalty on the amount that you withdraw. That can add up and take a serious bite out of your savings. However, many find themselves in a position where they simply don’t have the money to cover an unexpected emergency expense and have no other choice but to tap into their retirement savings.
If you need to tap into your IRA or 401(k) account, you should be aware that the IRS makes exceptions to the penalty rule for a number of situations. The most recently added exception is for Coronavirus-related hardships.
Congress decided in late March that Americans who were affected by the pandemic and the subsequent shutdown can take a withdrawal of up to $100,000 from their 401(k) or IRA without incurring the typical penalty. This option is available to people who meet the following criteria:
- Diagnosed with COVID-19
- Laid off, reduced hours, or furlough due to state shutdowns
- Unable to work because they had to be home taking care of children
- Owns a business that had to close due to the shutdowns
Keep in mind, while the 10% penalty will be waived for those who meet the criteria above, the withdrawal will still be subject to regular income tax. It’s also important to note that this option is not guaranteed, as plan providers are not legally required to provide this option. Some employers are choosing not to implement CRDs (Coronavirus Related Distributions). If you meet the criteria and want to make a withdrawal, you should consult with your plan provider about it first.
There are other exceptional circumstances under which you may be able to withdraw from your 401(k) or IRA penalty-free. These include:
- IRA distribution for qualified higher education expenses (tuition, books, fees, etc.)
- IRA distribution up to $10,000 for a first-time home purchase
- IRA distribution for medical expenses greater than 10% of your adjusted gross income that year
- 401(k) withdrawal for medical expenses greater than 7.5% of your adjusted gross income that year
- Distributions used to pay a court order for child support or alimony
If you are in a difficult financial situation and need to withdraw funds from a qualified retirement account, consult with Absolute Retirement Solutions. We can help you determine if there is a way for you to avoid the 10% penalty and help guide you on the tax consequences of an early withdrawal.
We do not provide tax, legal or investment advice. Always consult with qualified advisors concerning your own unique circumstances.