Retirement accounts, such as 401(k) plans and IRAs, are long-term, tax-advantaged savings accounts designed to help you amass enough money to stop working someday. Unfortunately, if you have incurred a lot of debt in your personal or professional life, you may have to consider using some or all of the money in your retirement accounts to help pay down your debt. The trick in using your retirement funds for other expenses is to avoid fees and penalties as best you can.
Step 1
Analyze your retirement plan. Although most retirement accounts share similar tax-advantaged characteristics, the details of the plans can vary considerably. Talk to your financial adviser, tax accountant and retirement plan custodian or administrator to understand the full picture of your retirement situation.
Step 2
Apply for a 401(k) loan. If you have a 401(k) account, you can probably take a loan from the account of up to $50,000 or half the value of your account, whichever is less. The benefit of a loan is that the money is not taxed as a withdrawal, and you pay both principal and interest back to your own account. Although the IRS permits 401(k) loans, individual employers have discretion over whether or not to offer them, so you must check with your 401(k) administrator.
Step 3
Use the 60-day rollover provision. The IRS does not allow you to take a loan from an IRA, but you are allowed to roll over IRA assets to another qualified plan as long as you redeposit the funds within 60 days. If your debt is short-term in nature, you can effectively "borrow" from your IRA by withdrawing money for 60 days and using that money to pay off your debt. You can use those 60 days to secure other financing if your debt is longer-term in nature.
Step 4
Withdraw your assets. If you have a tremendous hardship and your last option is to access the funds in your retirement accounts, contact your plan administrator or custodian and ask for the required paperwork. Distributions from retirement plans must be documented and reported to the IRS, as withdrawals are taxable at ordinary income tax rates and are subject to an additional 10 percent penalty if you are under the age of 59 1/2.
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