Should you ever spend your retirement money before you retire?

By AJ Smith/

We all know that saving for retirement is necessary and important for a healthy financial future. In an ideal situation, you would contribute regularly to a growing nest egg over decades, withdrawing funds only once you reach retirement. Unfortunately, things happen in life that may throw your plan off course. If you do need to make early retirement account withdrawals, it's a good idea to learn as much as possible about how it works and what it will cost you. Check out the information you need about pulling money from your retirement funds ahead of schedule below.

The rules

Each type of account -- 401(k), 403(b), IRA, etc. -- will vary a bit, but these vehicles are essentially designed to help you save for your senior years. For some, you contribute pre-tax dollars and then pay taxes later. If you take your money out of these accounts before the designated time, you can face serious tax consequences and a 10 percent early withdrawal penalty.

There are, however, exceptions for certain "hardship" withdrawals. For an employee-sponsored plan, this usually includes disability, death, certain medical expenses, higher education costs, home purchase, and house payments for a primary residence to help avoid eviction or foreclosure. Make sure you talk with your HR rep and/or your company's retirement plan representative to make sure you understand what those exceptions are.

A Roth IRA that is at least five years old will usually allow you to take out your contributions without any fee (you've already paid taxes before contributing to a Roth IRA), but you sacrifice your earnings. It's important to check your specific account rules before you make any decisions.

Withdrawal vs. loan

To avoid taking a withdrawal and potentially paying a significant sum, there is a retirement account loan option. Some employer and private plans allow you to borrow from your account, with interest. You then repay the loan and cover the interest by making higher deferrals from your paycheck. These loans usually feature lower interest rates than other loans and often don't require a credit check. The bad news for those taking loans from a defined contribution plan occurs if you leave your company -- voluntarily or otherwise -- before the loan is paid back. You will then usually have to pay the loan within 30-90 days. If a loan is not paid back within the set terms, it will be treated as a withdrawal and you will likely owe taxes and a penalty fee.

Tax implications

In addition to an early penalty fee, you can face additional taxes by withdrawing retirement funds early. You may have to pay income tax on the amount withdrawn in addition to that 10 percent penalty fee. The IRS defines an early withdrawal as taking money from your plan before age 59 ½.

So, in addition to reducing the money you have growing for your retirement years, you will have to pay tax and penalty fees. There are some options for people who want to tap their money without paying up, but that requires filing (and studying) some very complicated tax codes, like the SOSEPP (Series of Substantially Equal Periodic Payments) or the Additional Taxes on Qualified Plans.

The bottom line here is that withdrawing money from your retirement savings before you reach retirement is possible, but can be costly and negate many of the advantages these accounts offer. Skillful budgeting and an emergency fund can usually help you avoid retirement loans or withdrawals, so it's important to work on building those up alongside your retirement funds. If you have a good credit score, you may also be able to take out lower interest loans like personal loans or a home equity line of credit. These products come with their own unique set of pros and cons, so make sure you understand them fully before applying. You can see where your credit scores stand for free on