The Five Ways to Tap Your Retirement Money Without Penalties

Early withdrawals can increase your tax bill.
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To discourage you from raiding your retirement plan, the IRS tacks on an extra 10 percent penalty if you withdraw your funds early. However, the IRS has mercy by exempting certain withdrawals from the penalty, as long as you meet specific criteria. Don't confuse a hardship withdrawal with a penalty-free withdrawal; many hardships don't qualify as hardship withdrawals. For example, if you lose your job and need money for living expenses, you're stuck paying the penalty.


Employer provided plans, such as a 401(k) or 403(b) plan, may permit you to borrow from your loan. If you pay back the loan according to the terms of the agreement, you won't be taxed or penalized on the loan. You can borrow up to $50,000 or half your account balance, whichever is smaller, and you generally have to repay the loan over no more than five years. If you don't repay the loan, then it's counted as a distribution, subject to taxes and penalties.

Permanent Disability

All retirement plans make an exception from the 10 percent penalty if you become permanently and totally disabled. The disability has to be permanent or expected to last for an indefinite period. When you claim the exception, you should include a doctor's note verifying your disability. Be warned, however, that the exception for permanent disability only applies to the disabled person's accounts. For example, if your spouse becomes permanently disabled, money taken out of your account doesn't qualify.

Medical Expenses

All plans also permit an exception for any money that you withdraw that would qualify to be deducted as a medical expense if you itemized your deductions. As of 2012, this includes medical expenses that exceed 7.5 percent of your adjusted gross income. In 2013 and future years, it only includes expenses that exceed 10 percent of your adjusted gross income. Unlike the permanent disability exception, these medical expenses can be for yourself, your spouse or your dependents.

Higher Education Expenses

Qualified post-secondary education expenses for yourself, your spouse or your dependents permit you to avoid the penalty on early distributions from IRAs only. These expenses can be either undergraduate studies at any qualified educational institution including trade schools, vocational schools and nonprofit and for-profit colleges and universities. Qualified expenses include tuition, required fees, books and supplies. In addition, if the student is enrolled at least half the number of credit hours required to be considered full-time, room and board are also included.

Separation from Service after 55

If you leave your job after turning 55, you can avoid the early distribution penalty on withdrawals from an employer plan, such as a 401(k) or 403(b). However, this exception doesn't apply to IRAs. If you are a qualified public service employee, such as a firefighter or police officer, the age for the exception drops to 50. Unfortunately, if you roll your employer plan into an IRA after you leave employment and then take a distribution, the distribution is subject to the penalty.

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