When you have money sitting in a retirement account, it can be very tempting to access it when you have a financial difficulty. In some cases, you will have to pay penalties and taxes for touching this money early. In other cases, you can get away with some of the money without worrying about any tax liability.
If you have a 401k, it can be difficult to get access to the money you need without paying any taxes on it. If you take money out before you reach the age of 59 1/2, you will have to pay a 10 percent early distribution penalty as well as pay taxes on the money at your marginal tax rate. The only exception to this rule is if you use a 401k loan, which allows you to borrow money from your available balance without paying taxes on it.
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If you have an individual retirement account, you cannot access the money early without paying taxes on it. If you take money out of your account before 59 1/2, you will have to pay the same 10 percent early distribution penalty that comes with a 401k. You also have to pay taxes on the money that you take out at your marginal rate. The exception to this rule is if you take money out for qualified education expenses or use $10,000 of the money for your first home.
If you have a Roth IRA, you may not have to worry about any penalties or taxes when you take your money out. Roth IRAs are funded with money that you have already pay taxes on once. This means that you can always take the money that you have contributed to the Roth IRA back out again without any taxes or penalties. If you take money that you have earned from investments, then you would have to pay the 10 percent early distribution penalty and taxes.
Substantially Equal Periodic Payments
If you want to access your money before you turn 59 1/2, you could use the substantially equal periodic payments system. This allows you to take money out of a qualified retirement account, such as an IRA in regular distributions every year. With this account, you have to be careful that you do not take up too much because you have to keep going for a certain amount of time. You have to keep taking distributions until you reach 59 1/2 or until five years have passed, whichever option takes longer.