IRA Or 401(k) withdraw

When You Can Withdraw Funds From An IRA Or 401(k) Without A Penalty?

IRA and 401(k) accounts allow people to save for retirement using tax-advantaged funds. Money that accrues in these funds does so without tax, increasing savers’ ability to prepare for retirement. However, because of the advantaged status that such accounts enjoy, they also have many legal limitations. One limitation keeps savers from contributing more than a certain amount of money annually. Another limitation discourages savers from withdrawing funds before retirement by placing a 10 percent early withdrawal penalty on the account. However, in some circumstances, savers can withdraw funds from their accounts without incurring this withdrawal penalty. The following will detail these circumstances.

To Pay For Medical Expenses

Unexpected medical expenses can quickly become large financial burdens. To help alleviate this burden, the federal government allows people with IRA or 401(k) accounts to use account funds for medical expenses without incurring the 10 percent penalty. For medical expenses, you may use account funds in two ways: to directly pay expenses or to pay for health insurance. However, to use account funds without incurring the penalty, you must first use at least 7.5 percent of your adjusted gross income to pay your medical bills. These medical expenses also must be unreimbursed, meaning that neither your employer nor any other party will reimburse you for them later. When it comes to insurance, you may only withdraw funds without penalty to pay for health insurance if you meet certain requirements. First, you must be unemployed. Second, you must have received unemployment benefits for at least 12 consecutive weeks. Third, you must make the withdrawal either during the year of your unemployment or during the following year. (To learn how to keep your health insurance coverage if you lose your job, see How To Keep Your Employee Health Insurance Coverage If You Lose Your Job.)
To Make Disability Distributions

The purpose for IRA and 401(k) accounts is to help people save for when they are unable to continue working. For most people, this time comes at a certain retirement age. However, for some people, disability comes a significant time before retirement. For that reason, the federal government allows people who develop disabilities to start receiving distributions from their tax-advantaged accounts without penalty, regardless of their age. However, such people must meet certain conditions. First, the disability must be verified by a physician, who must assert that it is significant enough to keep the person from working. Second, it must either be part of a terminal condition or permanent. A temporary disability such as a broken limb – while possibly debilitating – does not qualify an individual for penalty-free distribution of funds because it is considered temporary. (For more information about disability insurance, see How To Buy The Best Disability Insurance Policy.)
To Pay For Higher Education Expenses

Higher education is an important investment that can considerably improve someone’s earning potential, and having an educated populace is beneficial for the economy in general. For this reason, the federal government allows people with funds in tax-advantaged accounts to withdraw those funds before retirement without any penalty if they intend to use those funds to pay for qualified expenses related to higher education. If you have money in your retirement account, you can use it to pay for tuition, fees and books so that you, your spouse or your child can attend an institution of postsecondary education. However, the institution must qualify for federal financial aid programs such as Stafford Loans and Pell Grants. (For tips on how to save for you or your child’s higher education, see 6 Tips On How To Save Money For College.)
To Claim Inherited Assets

In the case of an IRA, if the person owning the account dies, it becomes an asset that passes on to the owner’s designated beneficiary. The designated beneficiary may take distributions from the inherited IRA without penalty unless he or she is a spouse who is rolling over the inherited IRA into his or her own IRA. However, if you take distributions from an inherited IRA, you must indicate that they are from an inherited IRA when you report them to the IRS. Otherwise, the IRS may try to penalize you. Keep in mind that the withdrawn funds will likely be taxed by the IRS. (For more information on what to do if you inherit an IRA, see The Rules For An Inherited IRA.)
To Buy A Home

Buying a home is one of the most expensive investments most people make. Even though most people finance the cost of the home over many years, the initial phase usually results in a number of closing costs, which can be expensive on their own. To help pay for the closing costs associated with home purchases, the IRS allows people to take penalty-free withdrawals from tax-advantaged accounts up to $10,000. However, this only applies if the home you are purchasing is a first home. (To learn more about the different closing costs associated with buying a home, see Important Closing Costs And Fees To Consider When Buying A House.)
Breaks For Military Reservists

If you are a military reservist who has been called to active duty, you can enjoy penalty-free disbursements. However, your period of active duty must last at least 179 days, and all of the disbursements must occur during this period.
To Pay Your Tax Bills

If the IRS sends you a tax bill and it has reason to believe that you will not or cannot pay it, it may decide to tap your IRA or 401(k) for the money you owe. While this is never a desirable event, it is at least nice to know that the IRS does not apply the 10 percent penalty on the funds it withdraws. However, this is only true if the IRS actually retrieves funds from your account through a levy. If you withdraw funds on your own to pay a tax debt, the penalty still applies.
Borrowing Funds

The IRS allows people who have paid into IRA or 401(k) accounts to borrow money from those accounts for any reason as long as they pay it back. This can give people with such funds a lot of financial flexibility, allowing them to take care of many unexpected expenses with minimal trouble. However, certain limitations and dangers apply, and they differ depending on the type of account.

For an IRA, you may borrow cash from your account without penalty as long as you pay it back in full within 60 days. Since you are essentially borrowing from yourself, there are minimal barriers to deal with, and you do not need to pay interest. However, if you have not returned the full amount back into your IRA within 60 days, the 10 percent penalty applies to whatever you still owe.

For a 401(k), things are a little more complicated. This is because you do not technically own the account. The good news is that you do not have to repay it in full within 60 days like you have to with an IRA. You also do not have to worry about a credit check for this loan. The bad news is that you do have to pay interest. Also, since the 401(k) is tied to your employer, if you lose your job, you must repay the full amount within 90 days.
Bottom Line

The ability to withdraw or borrow funds from your IRA or 401(k) can be very useful if you need to do so. However, most tax and personal investment professionals advise against making any kind of withdrawal before retirement, as the entire purpose for such accounts is to earn interest and save money for later. If you are considering taking money from your retirement accounts early, you may want to consult a financial adviser or tax pro first.

more @ http://www.candofinance.com/retirement/withdraw-funds-from-ira-or-401k-without-penalty/