Get Money Out of Your IRA Early. No Penalty. No Problem.

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This post was updated on April 3 to note that withdrawals of Roth IRA contributions are always exempt from taxes and penalties.
When it's time to take money out of your 401(k) or IRA, the magic number is 59 Â½. That's the age at which you can withdraw money from a retirement plan without handing the IRS a 10% bonus on top of the regular taxes you will owe. Everyone knows that, right?

Judging from the mail I get, everyone does indeed. But what not everyone knows is that the age 59 Â½ rule has more loopholes than Tiger Woods' marriage contract. For most practical purposes, the penalty-free retirement age in a 401(k) is 55, and it can be lower still for an IRA. Early retirement, medical emergencies, job loss, early retirement, college education, a home purchase-all qualify as exceptions that can make your retirement money more available than you thought. Here's how it works:

Separation from service after age 55 (401(k) only) Your 401(k) money becomes yours without a penalty if you leave your job after age 55. It doesn't matter whether the departure was your idea or your employers', or whether you permanently go fishing at that point or find another job the next day. You just need to "separate" from your employer.

Yes, you still have to pay regular income taxes on the money you pull out, but you'd owe those no matter when you took the money. Just be careful not to roll the money over into the 401(k) at your next job (if there is one) or into an IRA. Either move would put you back on the penalty track.

Substantially equal payments (IRA only) If you want to turn your retirement money into an income stream before you're too old, you can do it with the help of what the IRS calls rule 72t. This allows you to dodge the penalty as long you take the money out in "substantially equal" payments over your remaining lifespan or that of you and a beneficiary.

There's even a loophole within this loophole. The payments don't' really have to stretch over your remaining lifespan. You've satisfied the IRS if the payments last five years or until age 59 Â½, whichever comes later. After that you can take out as much or as little as you want.

There are a handful of ways your withdrawals can qualify as "substantially equal" in the eyes of the IRS, and they can get complicated. The web abounds with 72t calculators to help you sort things out, but you might want to double check the formula you settle on with a tax adviser.

Your original investment (Roth IRA only) Unlike a 401(k) or traditional IRA, a Roth IRA doesn't give you a tax break on the money you put into the plan. Since you've already paid taxes on that money, the IRS considers it yours. Your age doesn't matter: You can get at that money without penalty or even income taxes. Both taxes and the 10% penalty apply to the earnings on your contributions, though, until your odometer hits 59 1/2 and you've had the money socked away for five years (with a few exceptions, below).

Emergencies (IRA, Roth IRA and 401(k)) The tax code doesn't want you pulling money from your retirement money for just any reason, but it's not nasty about it. If you become disabled, lose your job and have to pay premiums for medical insurance out of your retirement funds, or run into medical expenses that exceed 7.5% of your adjusted gross income (whether you have a job or not), you won't face the 10% penalty.

Worthy causes (IRA and Roth IRA only) The IRS also looks favorably on withdrawals you might make for what the tax code deems to be a worthy purpose. What's worthy? A college education for yourself or a close family member, or up to $10,000 for the purchase of your first home ($20,000 if you're married). Either purpose lets you at the money in your IRA (or the earnings on your Roth IRA) penalty-free.

Obviously, you don't want to enroll in any tax-deferred retirement plan with the idea of pulling the money out early. Retirement is one goal you can be pretty sure you're going to have to fund out of your own pocket, and you don't want to let diversions leave you short-even if the diversions include a college education or a home. But life doesn't always work out the way you plan. If that happens, the penalty-free loopholes can help you come up with the funds you need without a 10% windfall for Uncle Sam.

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