How to Get Cash Out of Your 401(k) or IRA Without Paying a Penalty

A lot of people have been using their 401(k) plan as a source of cash. When Fidelity asked some of them why they were tapping into money earmarked for retirement. They responded that the money was needed to keep their home, to pay for college or to purchase a home.

If you’re considering a withdrawal from your 401(k) or IRA to get cash to make ends meet take a look at these options to get the money without incurring a 10% penalty:

Take out a 401(k) loan. Most 401(k) plans and several other types of employer-sponsored plans allow investors to borrow up to half of the vested balance in their account, up to $50,000. Terms vary, but most require borrowers to repay the loan within five years. Those who use the money to buy a home often get a longer repayment period.

The 401(k) loan usually doesn’t require a credit check, usually there is very little paperwork, and you often get a better interest rate than at a bank. But while contributions to a 401(k) are made with pretax dollars, payments on a 401(k) loan are not. When investors withdraw that money in retirement, they’ll have to pay taxes on it.

Take regular distributions from an IRA. Investors can make regular withdrawals of equal amounts from their IRA over a predetermined period without paying the 10% early-withdrawal penalty, provided they adhere to a schedule. Investors must take these payments, known as 72(t) distributions, at least once a year for a minimum of five years or until age 59 1/2, whichever takes longer.

You get a regular stream of income for an extended period. But the income would be taxable, and the IRS will impose tough penalties on an investor who doesn’t follow the schedule.

Tap a Roth IRA. Accessing funds in a Roth is one of the easiest ways to tap retirement funds, so investors must weigh the ease of access against the long-term harm to your retirement saving strategy. Because contributions are made with aftertax money, consumers can make withdrawals of contributions, though not earnings, without paying penalties or taxes. But the long-term impact of taking the money out of a Roth can be significant: You don’t have as much money in there growing for years tax-free.

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