If you have any type of tax advantaged retirement account such as an IRA, Roth IRA, 401(k) or annuity, you are not able to take withdrawals prior to age 59 ½ without incurring a 10% early withdrawal penalty. What most people don’t know is that there are ten ways that this penalty can be avoided. Check with your tax professional or financial advisor to make sure that you execute these strategies appropriately so that you don’t incur the penalty plus interest that can be charged to you when this is done incorrectly.

Ways You Can Avoid the Early Withdrawal Penalty

1. You establish a series of substantially equal periodic payments (based on Section 72(t) of the Internal Revenue Code) that are made at least annually and continue for the course of your life expectancy (or the joint life expectancies of you and your designated beneficiary). If taking money from a company plan, payments cannot begin until you leave the employer. Once you begin this process, you cannot make any changes until you reach age 59½, or until five years has passed, whichever is longer.
2. You become disabled prior to 59½.
3. You separate from service after age 55, meaning you quit, retire or are discharged from your employer.
4. You get divorced, and the money is distributed to you in accordance with a Qualified Domestic Relations Order, issued by the judge.
5. You use the money to pay for qualified medical expenses. Among other requirements, such expenses must exceed 7½% of your Adjusted Gross Income.
6. You contributed too much money to your IRA or retirement plan, and you remove the excess from your IRA (or your employer returns the excess plan contribution to you). The return of excess contributions is not subject to the 10% early withdrawal penalty. However, if the excess contributions are not removed in a timely manner, additional penalties and interest could apply, dwarfing the 10% penalty.
7. An employer’s matching contribution to your 401(k) was excessive.
8. You made voluntary deferrals to your 401(k) plan in excess of IRS limits.
9. You receive dividends from stock that is part of an Employee Stock Option Plan.
10. You die.

Of course no one plans for the tenth way to avoid the ten percent penalty but in the unfortunate event that someone does die before needing their retirement funds, the penalty will be avoided.

An Alternate Strategy: Borrow from Yourself

In addition to these strategies, you can also take loans out of your account without penalty to pay for many things including down payments on a house or pay down debt. As you repay back the loan, the principal and interest is paid back to your account. This is another creative way to not only make returns on your account but avoid penalties from early use of the money.

Disclaimer: Please seek professional advice regarding tax liability and investing options based on your personal situation.