3 times it's ok to dip into your 401(k)

Dipping into your 401(k) or IRA early is almost always a bad idea. Not only will you potentially face all kinds of early withdrawal fees and taxes (for those 59 ½ or younger), but you also lose out on all the potential gains you might have enjoyed had you left your money where it was.

However, there are certain circumstances where you can make early withdrawals and still avoid paying the typical penalties that come with making them.

1. Making a first-time home purchase

Retirement account holders can withdraw up to $10,000 to make a first-time home purchase. In addition, you can qualify for an exemption from the early withdrawal tax penalty if you’re helping a spouse, child, grandchild, or parent purchase a home.

2. Paying for college expenses

Early withdrawal penalties can be waived for individual retirement account (IRA) distributions used to pay for college expenses like tuition, fees, books, and supplies, for either the account holder or their spouse, children, or grandchildren. That’s the good news. The bad news is that you could still incur income taxes on some or all of the amount withdrawn, according to the IRS.

Unfortunately, 401(k) withdrawals made for educational expenses are still subject to income tax and early withdrawal penalties.

3. Covering certain medical expenses

If you use money from your IRA to pay for unreimbursed medical bills, you may be able to avoid the early withdrawal penalty. The money must be used to pay unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income to avoid paying an early withdrawal penalty.

But consider your nest egg a last resort. Try to negotiate lower fees for medical services after you’ve been billed.

The bottom line: Remember that for whatever money you do take out of your accounts, it’s best to double down on your efforts to pay that money back into your accounts up to the caps for these accounts each year. The longer your money is out of the market, the more money you are likely missing out on earning in dividends.


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