8 Times It's Okay to Dip into Your Retirement Savings

Posted April 05 2015
by PenFed Team
Older couple looking over finances

No time is a “good” time for dipping into your retirement savings, but are there times it can be an acceptable solution to your financial needs? In fact, there are—as long as you remember that they usually come with a lot of strings attached.

Saving for retirement is a game of long-range numbers. It’s not as much about how much you can tuck away as it is how much you can make what you’ve tucked away grow. So when you pull money out of your retirement fund, you’re not only reducing the amount of principal earning money—hopefully, only temporarily—but you’re irrevocably subtracting the time it needs to grow.

Remember too that withdrawals from anything other than a Roth IRA typically count as income. If you’re pulling money from your retirement fund because you’re in a cash crunch, you could find you’ve complicated matters by increasing your actual income and pushing yourself into a higher tax bracket.

When to withdraw from retirement savings

There are times when dipping into your retirement fund can makes sense, and there are also times when you can do so without incurring tax and withdrawal penalties. It’s okay to withdraw from your retirement savings when:

  1. Your employer allows loans from your 401(k): Some employers allow you to borrow up to half of your 401(k) plan balance, up to $50,000. You’ll have to pay it back with interest, but being the owner of your account means you’re paying interest to yourself—not such a rotten deal after all.
  2. You’re buying your first house: You can pull up to $10,000 from a pre-tax IRA without penalty if it’s used to finance your first home. Take note: The same withdrawal from a 401(k) plan will cost you a 10 percent penalty.
  3. You’re financing education costs: As long as you’re spending it on educational expenses, you can withdraw from your IRA without penalty before age 59 and a half.
  4. You’re paying off high-interest debt: Penalties and tax implications aside, wiping away the interest that’s eating you alive will probably have a vastly stronger positive impact on your finances than anything you could earn on your retirement savings.
  5. You become completely and permanently disabled: If you become totally and permanently disabled, you can take penalty-free distributions from qualified retirement plans. Partial and temporary disabilities do not qualify.
  6. You’re buried under medical costs: You are allowed to withdraw from your retirement accounts if your out-of-pocket medical expenses exceed 10 percent of your adjusted gross income. Expenses must occur within a single tax year.
  7. You’re getting divorced: If the court rules that you must divide your retirement savings, these withdrawals are penalty-free.
  8. You’re 59 and a half years old or older: Withdrawing money from a 401(k) or IRA before this age is subject to a 10% penalty on top of federal and state taxes. After that, it’s up to you.

Why the smart money’s on patience

Even when retirement feels a long way away, it almost always makes more sense to find other ways to cover your back in a crunch than dipping into your retirement funds. If you own your home, for example, you could take out a home equity loan or line of credit.

Ask yourself if the money you’re planning to take is a need or just something you’d like very much. There’s a difference between dipping into your savings for an emergency versus a desire you can save for with a little planning and time.

And if you haven’t gotten started with your retirement savings yet, turn to PenFed for an IRA that fits your current retirement savings needs. Choose from accounts that let you pay no taxes on money you deposit now, accounts with high-yield returns, accounts providing for tax-free withdrawals, and more.