The Withdrawal of Retirement Funds Early

When you put money into a retirement plan, the idea is to keep the money in the account until you begin your retirement. In some cases, however, you may need to access your retirement funds before you can retire. While there are a number of ways that you can gain access to your retirement funds, some of them will cost you a penalty.

Early Distribution Penalty

Should you decide to take money out of a qualified retirement plan, such as an individual retirement account or a 401(k), you will have to pay an early distribution penalty to the Internal Revenue Service when you file your year's taxes. This penalty is equal to 10 percent of the total balance that you withdraw. In addition to paying the early distribution penalty, you will also have to pay taxes on the total amount withdrawn. The amount that you withdraw will be added to your annual income amount and you will be taxed at the appropriate marginal tax rate. This penalty applies regardless of whether you are taking the money from an individual retirement account or from an employer plan.


If you want to gain access to your money without penalty, one option that you have is to use the substantially equal periodic payments, or SEPP, system. With this plan, you have to take equal payments from your retirement plan until you reach 59 1/2 or for five years, whichever option is longer. If you begin taking distributions too early, however, you can quickly deplete your retirement account. This plan is available to anyone regardless of how old they are. This plan allows you to take money out of your retirement only because you do so through periodic distributions for many years. Although the SEPP system could be used as an early retirement, as you will be depleting your retirement savings account, it should not be seen as a one-time fix for financial problems.

Borrowing the Money

In some cases, you may be able to borrow from your retirement funds without incurring a penalty. If you have a 401(k), you can sometimes use a 401(k) loan to gain access to the money. You need to check with your plan provider to see if this is an option for your particular plan. If it is an option, you can borrow the money and then repay it with interest over a certain number of years.


If you have an individual retirement account or a Roth IRA, you can access the money for certain expenses without having to pay a penalty. For example, if you use the money for the purchase of your first home, you can take out $10,000 without penalty. You can also use the money to pay for qualified higher education expenses. Additionally, if you have substantial medical bills for the year, you can pay for them with your retirement funds without penalty.


About the Author

Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.