Penalties

• If you are under age of 59 1/2, any withdrawal or disbursement from an IRA or 401k is subject to a 10 percent tax penalty. In addition, the amount withdrawn must be included as part of your annual income, forcing you to pay additional taxes on the amount. For some, that might equate to 30 to 40 percent on the amount you withdraw. For 401ks from your employer, if you retire after age 55 and before age 59 1/2, you will still have to pay income tax on withdrawals, but are exempt from the 10 percent penalty.
  
  

Exceptions

• You can take withdrawals from your retirement account penalty-free for certain expenditures. You may get money for out-of-pocket medical expenses; education expenses for yourself, children or spouse; COBRA health insurance coverage during periods of unemployment; prevention of eviction from your primary residence; to make vital home repairs; or to make a down payment on your first home.
  
  

Qualified Domestic Relations Order

• You may also use a penalty-free distribution from your 401k to pay alimony or child support, but only if you have an established Qualified Domestic Relations Order. A QDRO typically results from a divorce or custody proceeding and is a legally binding court order. You may also use 401k funds to reimburse an ex-spouse for his half of jointly owned property. You cannot claim exemption from the penalty for early withdrawal from an IRA if you are using funds to meet obligations under a QDRO.
  
  

Loans

• If you must take an early withdrawal from your retirement account, start by taking a loan against your funds first, if your plan allows that option. There is no tax penalty for a loan, and it isn't included in your annual earnings, since you are repaying the funds to yourself over a period of time, typically up to five years. There are negatives to taking a loan. You lose investment potential by removing funds from your account, and you will be taxed twice on the money used to repay the loan -- first, by your employer, as loan payments are applied after taxes and second, when you begin receiving distributions at retirement and have to pay taxes on the amounts again.