Generally, when you save for retirement, your goal should be not to touch the money until you are actually retired. Sometimes, though, life gets in the way and you need to dip into your retirement savings a bit earlier than planned. The government, though, often imposes some pretty steep penalties for early access to these funds, potentially rubbing salt in the wound of having to deplete your savings early. That said, there are several loopholes you can look for that may allow you early access to your retirement savings without having to pay the price.
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For more help with planning for retirement, consider working with a financial advisor.
Loophole 1: Rule of 55
Generally speaking, you get access to retirement income at age 59.5. If you retire at age 55 or later, though, you can access money from a retirement account at the job you retired from without penalty. Behold the Rule of 55.
This means that if you’ve reached age 55 and you think you have enough money to fund your entire retirement, you can do it without having to pay a penalty. This plan is dependent, though, on not just having enough money saved overall, but having enough of it in a workplace plan at your current job. You could have $2 million saved from a previous job and you still wouldn’t have penalty-free access to it until age 59.5. Therefore, this loophole is best for those who’ve worked at a job for a long time and have the majority of their retirement savings in a plan sponsored by that company.
Loophole 2: Legal Exceptions
There are a number of exceptions legally defined by the government where a person can take money from their retirement accounts without having to pay any penalty. These include:
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Becoming permanently disabled
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Paying for qualified higher education expenses
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Buying your first home (maximum withdrawal of $10,000)
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Paying for medical expenses costing more than 10% of your adjusted gross income
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Paying health insurance premiums while you are unemployed
If you fit any of these, you likely qualify for a withdrawal without penalty, but make sure to check with your plan administrator. You still may owe taxes if the account is tax-deferred.
Loophole 3: Roth IRA Contributions
With a Roth IRA, all of the money you put in has already been taxed. When you withdraw it in retirement, none of it is subject to taxes.
While you cannot withdraw any investment gains you’ve made until age 59.5, you can withdraw your actual contributions from a Roth IRA at any time. If you’ve contributed $4,000 a year for three years, you can take out up to $12,000 without any penalty — but you can’t take more, as that would eat into your earnings.