This week, Gail discusses how to tap retirement funds without getting slammed with penalties and taxes.

My husband lost his job due to a shutdown. He is 59 and is hoping that with his investments (401k, money market, etc.), he will be able to retire and in three years start drawing Social Security.

I heard somewhere that at some point in the future, withdrawals from retirement plans like 401(k)s will no longer be subject to income tax, that this was not going to be taxed in the future. Is this true?

Also is this a really dumb idea or should we look at something else?

Thanks for your time,

Dear Nadine,
Withdrawals from tax-deferred retirement plans are subject to income tax today, tomorrow and every day into the foreseeable future! Don't get your hopes up. There is absolutely nothing afoot in Congress that would change this.

It's not "dumb" to use the money in your retirement account to cover your living expenses once you're retired. That's what it's for! However, this should not be undertaken lightly. In addition to owing income tax on the total amount withdrawn, you will be permanently removing this money from the tax shelter it was in. As long as the money remains invested in the 401(k) plan, there is no current tax due on any of the earnings. While there can be no guarantees, after a while, your earnings should be generating additional earnings. This is the essence of compounding.

So, I strongly suggest you first tap money that is not in a retirement account.

Usually you are subject to a 10 percent penalty if you touch any retirement money before you reach age 59-½. However, you can avoid this penalty if you are "separated from service" (laid off, fired) and are at least 55 years old. Since he is 59, your husband obviously qualifies.

So, the good news is you will avoid the 10 percent penalty for early withdrawals from a 401(k). The bad news is you can't escape paying ordinary income tax on the amounts your husband takes from the plan. But in fairness to Uncle Sam, remember that your husband didn't pay income tax on that money when it went into the plan years ago.

Happy retirement,

Hello Gail,
Is it true that if you leave a job for whatever reason after age 55 and withdraw your IRA, there is no 10 percent penalty assessed. If so could you quote me the regulation number and where this rule can be found?


Dear Otto,
No. You are confusing the rules covering early withdrawals from IRAs with those that relate to defined contribution plans such as 401(k)s.

The 10 percent penalty for premature distributions from a defined contribution plan is waived if you are "separated from service" after attaining age 55. For reference, see the Tax Relief Act of 1986, Section 1123(e)(3).

There is no similar relief for IRAs. The only way you can access the money in your IRA prior to reaching age 59-½ without incurring a penalty is to use a method known as "Substantially Equal Periodic Payments." This involves withdrawing roughly the same amount of money from your IRA each year for at least five years or until you reach 59-½, whichever takes longer.

This is more difficult than it sounds. First of all, you do not get to choose how much money you want to withdraw from your IRA each year. The Internal Revenue Service has provided three different formulas to arrive at an amount. Once you choose a method of calculating your annual withdrawal, you cannot change it. In fact, if you do not follow the rules for this to the letter, the IRS can (and probably will) declare the entire process in violation and hit you with a 10 percent penalty going back to the first dollar withdrawn.

Scary? You bet. This is not something I recommend you undertake without the assistance of either a financial advisor or a tax professional.

Take it slow,

Dear Gail,
If I were to take my 401K before the age of 59-½, do I have to pay a penalty plus tax and a capitals gains tax. I am currently 53 years old, and possess 94K in my 401K.


Dear Monica,
Stop! It's worse than you think. You don't owe capital gains tax on the money withdrawn. You owe ordinary income tax on it and that is substantially higher. If you are subject to a capital gains rate of 20 percent, your ordinary income tax rate will be 27 percent or higher. In other words, you'll lose more than a quarter of the money you withdraw to pay income taxes due on the total.

Then, as you're aware, you will owe an additional 10 percent as a penalty for taking the money out prior to age 59-½. So get ready to kiss bye-bye to more than a third of your withdrawal.

Even if you're tapping your 401(k) because you were laid off, you don't meet the minimum age requirement (55) to avoid the penalty. (See the two answers above).

This is a really, REALLY bad idea. Do whatever you can (legally) do to find the money you need from another source.

I mean it,

If you have a question for Gail Buckner and the Your $ Matters column, send them to moneymatters@foxnews.com along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.