How to Raid Your IRA and 401(k) Retirement Plans

Learn the options for withdrawing funds from your retirement accounts early so you don’t make a costly mistake.

Laura Adams, MBA,
November 16, 2011
Episode #243

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Leslie asks:

I have some high interest loans that I really want to pay off. My credit score isn’t good, so refinancing them for a lower rate isn’t possible. Can I withdraw money or take a loan from my 401(k) or Roth IRA to pay off my expensive debt?

If you’re like Leslie and are itching to raid your retirement account, you need to understand the rules. Different types of retirement accounts have different regulations for withdrawals that occur before you’re officially retired. I’ll tell you what you need to know so you don’t make a major mistake and sacrifice your future.

How Retirement Accounts Work

The rules for retirement accounts were designed to discourage you from dipping into them before retirement—or at least before you reach the official retirement age of 59½. The government gives you money-saving tax breaks to make retirement contributions, but they also charge you tax and penalties when you break the rules. That’s why you should never put money in a retirement account that you might need early.

Additionally, retirement accounts aren’t piggy banks that you can just crack open anytime you want some extra cash. You generally have to complete paperwork to document how you plan to use a withdrawal and, in some cases, provide financial records to prove that you don’t have enough money or assets to cover the expense on your own. Some retirement accounts have strict regulations that make it very difficult to get money out, even if you have a devastating financial hardship.

The Rules for Raiding a Workplace Retirement Account

The government gives you money-saving tax breaks to make retirement contributions, but they also charge you tax and penalties when you break the rules.

If you take an early withdrawal from a traditional 401(k) or 403(b), the amount is subject to ordinary income tax plus an additional 10% penalty. There are only a few reasons the IRS even allows you to take a distribution from a workplace retirement plan, and I’ll cover those in just a moment.

Additionally, the retirement plan document that your employer created can further restrict what distributions are allowed. So always refer to your plan document or speak to your benefits administrator at work to fully understand your options.

If it’s permitted by your retirement plan, the IRS generally allows you to withdraw money from a 401(k) or 403(b) in the following 6 circumstances:

  1. To pay funeral expenses
  2. To pay health insurance premiums if you become unemployed
  3. To pay medical expenses
  4. To pay higher education expenses
  5. To buy or repair a principal residence
  6. To make mortgage payments that would prevent foreclosure of your principal residence

Although withdrawals for these 6 situations are allowed, they still incur a 10% penalty. There are several exceptions to the 10% penalty, including death, becoming disabled, or receiving a call to active military duty.

So to answer Leslie’s question: she cannot withdraw money from her 401(k) to pay off debt, because that isn’t a permitted withdrawal reason. However, if her retirement plan allows for loans, that could be an option. Read Should You Take a 401(k) Loan? to find out more.