Trouble started when Terri got into a traffic accident that left her with neck and back injuries and a smashed knee. It would be months before she could return to work. Meanwhile, Matt's employer lost some big clients and had to cut back costs, so Matt got laid off from his job.
Suddenly, the O'Reillys were facing significant medical expenses and months of reduced income. Medical, disability and unemployment insurance helped but it was also the beginning of the Great Recession. Matt was unable to find a job in his field and had to take part-time work at a mini-mart. When Terri was ready to go back to work, her employer couldn't afford to take her back. The O'Reillys, who had always managed their finances well, were getting close to running out of money and to make matters worse, they were supporting two children in college at the same time. At that point, Matt and Terri started thinking about making the major decision of withdrawing money they needed from their retirement savings, even though most retirement advisers discourage anyone from doing that.
Common ways to access retirement funds
There are two common ways to access the money in your retirement accounts: taking an early withdrawal or taking a loan against your retirement account balance. Each might seem like a good idea at the time, but they are prime reasons why so many people have little or no retirement savings.
Early retirement fund withdrawals
If you decide to take an early withdrawal from your retirement account, there are some basic rules you'll need to be aware of before making that decision. For example, you, typically, need to leave money in your retirement plan until you turn 59 ½ years of age. If you withdraw funds early, the money you withdraw will be taxed as ordinary income and may incur the 10% early withdrawal penalty. You might not be subject to the 10% penalty if you are withdrawing money to pay for college for a family member (IRAs and Roth IRAs only) or if you separated from your employer after age 55 (employer plans only). You also might avoid the penalty if you are unemployed and paying health insurance premiums) or if you are unemployed or employed and your medical bills total more than 10% of your adjusted gross income. Internal Revenue Service early withdrawal guidelines allow you to withdraw up to $10,000 without penalty if you are buying a first home. (See: IRS, Early Distribution from Retirement Plans May Have a Tax Impact, IRS Tax Tip 2012-34, February 21, 2012).