Tapping Retirement Accounts to Cope with Unemployment

Find out if you can avoid the usual early withdrawal penalty.

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About 9.5 percent of the American workforce was unemployed in July. Many of these workers are turning to their retirement accounts to make ends meet. Over half (55 percent) of adults between ages 18 and 64 who were jobless for 6 months or more at some point during the recession had to withdraw money from their retirement savings to pay their bills, according to a recent Pew Research Center survey.

[See 10 Places to Reinvent Your Life in Retirement .]

While 401(k)s and IRAs can be a quick source of cash for people without a sufficient emergency fund, workers who take early withdrawals from these accounts will come out behind in retirement. Withdrawals from IRAs before age 59 1/2 and 401(k)s before age 55 come with a 10 percent penalty plus income tax on the amount withdrawn. But if you do need to tap your tax-deferred savings before retirement, there are a few ways to do it without paying the 10 percent tax penalty.

[See How to Keep Your Nest Egg Intact After a Layoff.]

Avoid penalties when you spend on necessities. You can use your retirement accounts to pay for unreimbursed medical expenses that total more than 7.5 percent of your income. Workers who receive unemployment compensation for 12 consecutive weeks can also use their IRA, but not 401(k), to pay for medical insurance.

Weigh 401(k) rollovers carefully. IRA accounts generally give you more options to avoid the early withdrawal tax. For example, IRAs can be used to pay for higher education expenses and a first home purchase up to $10,000 without penalty. However, if you were laid off in your late 50s and looking to avoid the penalty, it might be better to leave the money in your 401(k). Workers who leave their jobs can take penalty free 401(k) withdrawals at age 55 while IRA account holders must wait until age 59 ½ to avoid losing 10 percent of their money. Income tax, however, is still due on withdrawals from both types of accounts.

[See 7 Penalty-Free Ways to Tap Your IRA Before Retirement.]

Consider setting up annuity payments. Early distributions from IRA accounts are also allowed if they are part of a series of equal payments over your lifetime. Retirement savers must use one of three IRS-approved distribution methods and take at least one withdrawal annually.

Tell us, have you tapped your retirement accounts to cope with unemployment?