Health insurance premiums
Penalty-free withdrawals can be taken from an IRA if you're unemployed and the money is used to pay health insurance premiums. The caveat is that you must be unemployed for 12 weeks.
To leave a clean trail just in case of an audit, Rothstein suggests opening a separate bank account to receive transfers from the IRA and then using it to pay the premiums only.
"Or the best way is to have the money sent to the insurance carrier directly," he says.
Death would seem to be the ultimate hardship and when an IRA account holder dies, the beneficiaries can take withdrawals from the account without paying the 10 percent penalty. However, the IRS imposes restrictions on spouses who inherit an IRA and elect to treat it as their own. They may be subject to the penalty if they take a distribution before age 59½.
If you owe the IRS
If Uncle Sam comes after your IRA for unpaid taxes, or in other words, places a levy against the account, you can take a penalty-free withdrawal, says Certified Financial Planner Joe Gordon, co-founder of Gordon Asset Management in Durham, N.C.
After all, it's going to the government anyway.
Though you may take money out of your 401(k) to use as a down payment, expect to pay a 10 percent penalty.
However, take the money from your IRA, and it's penalty-free. The penalty-free withdrawal is not limited to first-timers either. Homebuyers must not have owned a home in the previous two years, though. Further you can take more than one penalty-free withdrawal to buy a home, but there is a $10,000 limit.
For example, says Rothstein, "You can do two $5,000 withdrawals, but $10,000 is the lifetime limit."
Taking money out of a 401(k) for a down payment can be trickier.
"When the 401(k) has both a loan provision and hardship withdrawal provision, the participant must first use the loan provision before going to hardship," says Gordon.
Higher education expenses
Similarly, withdrawals can generally be made from a 401(k) to cover higher education expenses if the plan allows hardship withdrawals, but they will be subject to the 10 percent penalty.
From an IRA, however, it's a different, penalty-free story.
"It can be for yourself, your spouse, children, grandchildren, immediate family members. Typically it will cover books, tuition, supplies, room and board and for postsecondary education," says Kirchner.
For income purposes
Section 72(t) of the tax code allows investors to take money out of their retirement plan for income, but there are restrictions.
"You'll have to take substantially equal periodic payments" over time, says Kirchner.
The shortest amount of time that payments must be made is five years. One option is taking a distribution annually for five years or until age 59½, whichever is longer.
For example, early retirees may want to tap their retirement accounts before Social Security kicks in.
"The gist is that you take the payments and you pay the taxes, but you pay no penalty even if you're 52 or 53 years old," says Gordon.
There are other options for the distributions that allow an investor to take payments "over their life expectancy or do a reverse-mortgage-type amortization," Gordon says.
These periodic payments can also be spread over the course of your life and that of your designated beneficiary.
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