Tax-Smart Ways to Tap Your Nest Egg

You can withdraw funds from a Roth IRA without tax penalties to purchase a first home.

You can withdraw funds from a Roth IRA without tax penalties to purchase a first home.

Even though you have been diligently saving for your retirement, you may find yourself hit with unexpected major life change that could hurt your finances. As a result, you may want to tap into your next egg without being hit with a huge tax bill. In fact, there are ways that you can access the funds you need with a minimum of financial pain.

Potential Tax Penalties

Nearly all withdrawals from traditional individual retirement accounts trigger federal income tax liabilities, even after you retire. However, if you withdraw funds from your traditional IRA before reaching age 59 1/2, the Internal Revenue Service may potentially impose tax penalties of up to 10 percent over and above any actual tax liabilities you may incur. You may also be forced to pay a 10 percent tax penalty if you withdraw funds against the earnings of a Roth IRA before you reach age 59 1/2.

Brokerage Accounts

If you make withdrawals from a brokerage account or other taxable income source that you've held for longer than one year, you will pay no more than 15 percent in capital gains taxes to the IRS. In some cases, you will have no federal tax burden at all, at least through 2012. If you sell your account at a loss, you can apply that loss toward a maximum of $3,000 ordinary income in the present tax year, or apply the loss to income in future tax years.

Roth IRAs

Since Roth IRAs are funded with after-tax dollars, you may withdraw your contributions without incurring federal income tax liability. If you are older than age 59 1/2 and have held a Roth IRA for at least five years, you may also make withdrawals from the earnings in that account without incurring any federal income tax burden. If you are younger than age 59 1/2, you may make tax-free withdrawals against the earnings from your Roth IRA if you become disabled. You may also withdraw up to $10,000 tax-free from a Roth IRA during your lifetime to purchase or build a first home. If you die, your named beneficiary may also make tax-free withdrawals from your Roth IRA.

Loans from 401(k) Accounts

If your employer allows you to borrow against your 401(k), you may often do so without incurring federal income tax liability. The IRS allows you to borrow up to half your accumulated balance or $50,000, whichever is less. You must repay the money you've borrowed within five years, or risk being hit with federal tax liability and an early withdrawal penalty. However, the five-year repayment limit does not apply if you borrow the money to purchase your main home. In addition, you may continue to contribute to your 401(k). One caveat – if you leave or lose your job, you may have as little as 90 days to repay the money you’ve borrowed.


About the Author

Chris Blank is an independent writer and research consultant with more than 20 years' experience. Blank specializes in social policy analysis, current events, popular culture and travel. His work has appeared both online and in print publications. He holds a Master of Arts in sociology and a Juris Doctor.

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