The IRS has been busy lately – updating its Free File program, going after high income tax evaders and now it has another thing to add to the list: updating the exceptions to penalties on early retirement plan distributions. This is especially timely as difficult economic times have people pondering whether they might need their retirement funds right now and weighing their options for savings. The new updates the IRS outlined include provisions for emergency personal expenses and domestic abuse victims. Let’s look at the scenarios when you can pull money out of your retirement account penalty free and what’s covered.

Typically, with an individual retirement account you can begin to withdraw money penalty free at age 59 ½. If you want to withdraw money before this age, you’ll generally be subject to an additional 10% income tax as a penalty. There are some exceptions to this such as extreme hardships or certain life milestones. Remember that withdrawals that are penalty free are not always tax free. Withdrawals from traditional IRAs and 401(k) plans that were made with pre-tax contributions will be taxed at the ordinary income rates. Some hardships that qualify for penalty removal will still be subject to the regular taxes associated with them under these circumstances.

While the specifics of what’s covered differ from plan to plan, here are some of the usual penalty-free withdrawals you can make from your retirement account. You can make distributions of up to $5,000 per child for qualified birth or adoption expenses. If a participant or owner of an IRA becomes permanently disabled, that would also qualify for penalty-free withdrawals. Disaster recovery can also qualify for deductions: up to $22,000 to qualified individuals who sustain an economic loss by reason of a federally declared disaster where they live.

If you have a personal emergency and need to take out money from your IRA or 401(k) in a bind, you’re in luck. You can qualify for one distribution per calendar year for personal or family emergency expenses, up to the lesser of $1,000 or vested account balance over $1,000. First-time homebuyers and those seeking higher education might also qualify for penalty-free withdrawals. Victims of domestic abuse are eligible to withdraw up to the lesser of $10,000 or 50% of account, within one year of the date of the abuse. There are many other exceptions, ranging from medical expenses to military members. It’s worth taking a look at your plan to find out all the exceptions that might be relevant for you.

Retirement accounts are a great way to save for your future and grow your money but if you need to withdraw money earlier than age 59 ½, you can count on a penalties. However, under certain circumstances, like personal emergencies or childbirth, you can utilize your retirement account and take out your money without the additional penalties associated. Each of these scenarios can differ from plan to plan and have many caveats – it’s best to speak with a qualified tax advisor to find out what’s covered. If you have any questions on your retirement plan or tax planning, reach out to a ClarkSilva team member today!