Withdrawing money from retirement plans

Seven On Your Side
November 13, 2008 7:57:26 AM PST
First of all, financial experts do NOT recommend withdrawing money early from your retirement plans. With that said, today's realities that include sky high unemployment are leaving some little choice. So that means, 401(k)s and Individual Retirement Accounts (IRAs) may be liquidated. But there are some rules you should know about first. And, unless you're 59 1/2 years old, you may get penalized big bucks.Donna Anderson couldn't be more grateful for her niece. After surgery for congestive heart failure, she's been too weak to work, her niece has kept her afloat.

7 On Your Side's Tappy Phillips talked to Donna. "I wouldn't have a house now if it wasn't for her," said Donna. "She helped start paying the mortgage. She stepped in and paid my health insurance when I didn't have money."

But Donna's still cash strapped. That's why she began withdrawing from her retirement fund, an annuity left over from her old job. "It would help me get over the next couple of months," says Donna.

Experts say Donna's situation is becoming painfully commonplace. "We're seeing now there are instances where people need to get access to these funds," says Alan Kahn of AJK Financial Group.

Alan makes it very clear, he doesn't recommend withdrawing from these funds until reaching retirement age. (59 1/2) He says one main drawback is a ten percent tax penalty from the IRS. But...

"If you are disabled, have excessive medical expenses, you can take distributions, for example, from your IRA without paying the 10% penalty," says Alan.

In addition to medical expenses. The 10% penalty is also waived to buy a home, pay for college tuition, pay for funeral expenses, prevent eviction, or foreclosure or pay for damages from a flood or hurricane. But you have to qualify for these exemptions. "So you must check with your CPA before you take the distribution," says Alan.

As for Donna? She's learning that each retirement plan comes with its own set or rules. She's only been allowed to get a yearly pay out of just two thousand dollars. She's trying to get more. "It would get me over the hump for maybe the next two or three months."

If you're unemployed, our expert says you can roll your 401(k) into an IRA or Individual Retirement Account. One big benefit to the roll over is IRA's are less restrictive if you need to withdraw money from it. But one last caution on early withdrawals, whether you avoid the 10% penalty or not, you'll still have to pay taxes to the IRS on that money next April.

For more information on how to qualify for penalty free withdrawals:

Story by: Tappy Phillips

Produced by: Steve Livingstone