For years you have known not to touch the money in your 401k or IRA as substantial amounts of money would be lost in the shape of penalty fees and taxes. However, if the current turn of economic events is leaving you with no other option then to tap into the "forbidden zone" of your retirement assets, there are some steps you can take to help mitigate and lessen the damage you may cause by tapping into either your 401k or IRA for a pre-retirement withdrawal.
IRA penalty avoiding strategies vary. One option is instead of immediately retorting to withdrawing the money from an IRA, take a short term loan against the account. By ensuring that the amount withdrawn is either put back into the original IRA or invested into another traditional IRA the 10% penalty for early withdrawal will be avoided all together.IRAs can also be tapped into penalty free for specific reasons, such as qualified college costs, first time home purchasing or medical expenses, but this strategy does require that the money accessed is taxed as income for the year of the withdrawal.
If your spare money is invested into a 401k plan you need to take a different approach as different investment instruments have unique rules onto themselves. If you are working but need to access cash in your 401k fund then a loan against the account is your best move. That money must be paid back either over time if you are still an employee of the company that issued the fund or immediately if you are no longer working there.
Additionally 401ks can be tapped into for qualified hardship scenarios. According to the IRS:
"If a 401(k) plan provides for hardship distributions, it must provide the specific criteria used to make the determination of hardship. Thus, for example, a plan may provide that a distribution can be made only for medical or funeral expenses, but not for the purchase of a principal residence or for payment of tuition and education expenses. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards."
The final way you may be able to tap into your 401k or IRA without incurring too much financial damage is by taking a substantially equal periodic payment. TheDenise Appleby's Retirement Dictionary reports that the 10% government penalty for early withdrawal can be avoided if an investor takes a series of distributions from a qualified plan.
Before taking advantage of any of these strategies, make sure to discuss your options with your tax preparer as they are the best person to provide you guidance for this difficult decision.
