Dec. 23, 2013 -- intro: It always seems to cost a lot of money whenever life goes off the rails into uncharted chaos territory. After the emergency fund is drained from too many emergencies, where can you turn? For many people their biggest stash of savings is hidden away in tax-advantaged retirement accounts.
Unfortunately, the government imposes a 10 percent penalty on any withdrawals before age 59 1/2. Some early distributions qualify for a waiver of that penalty -- for instance hardships, higher education expenses and buying a first home.
Though the IRS does not recognize being flat broke as a hardship, there are situations when investors can tap their retirement plan before age 59 1/2 without forking over 10 percent to Uncle Sam.
quicklist: title: First draw from emergency fund text: Any thoroughly researched discussion on early withdrawals from a retirement account should begin with a firm reminder on the importance of keeping an ample emergency fund.
However, if you're considering taking money out of a retirement account early, it's very likely that the emergency-fund horse has already left the barn, so to speak.
"There are three levels of liquidity. People should have an emergency fund. The next level is investment accounts. And the next is retirement accounts," says Bonnie Kirchner, author of "Who Can You Trust With Your Money?"
Read more on Bankrate: Rethink cash in your 401(k)
"Even though (a retirement account) is a source of liquidity in an emergency, they should really try not to touch it," she says.
Now that you're properly chastised, if you do need to take a withdrawal, some hardship situations qualify for a penalty exemption from an IRA or a 401(k) plan.
Note that penalty-free does not mean tax-free. All traditional IRA and 401(k) withdrawals require that you pay taxes at ordinary income rates. Contributions to a Roth IRA can be taken out at any time, and its earnings may be withdrawn penalty and tax-free after five years. The same rules apply to a Roth 401(k),but only if the employer plan permits.
In certain situations, a traditional IRA offers penalty-free withdrawals even when an employer-sponsored plan does not. We explain those situations below. Also, be aware that employer plans don't have to provide for hardship withdrawals at all. Many do, but they may permit hardship withdrawals only in certain situations -- for instance, for medical or funeral expenses, but not for housing or education purposes.
These circumstances qualify for IRS-sanctioned, penalty-free hardship withdrawals.
quicklist: title:Unreimbursed medical bills text: The government will allow investors to withdraw money from their qualified retirement plan to pay for unreimbursed deductible medical expenses that exceed 10 percent of adjusted gross income.
The withdrawal must be made in the same year that the medical bills were incurred, says Alan Rothstein, a CPA at Rothstein & Co., in Avon, Conn.
Read more on Bankrate: Stable value: 401(k) 'anchor'
You do not have to itemize deductions to take advantage of this exception to the 10 percent tax penalty, according to IRS Publication 590.
quicklist: title: Disability text: The IRS dictates that investors must be totally and permanently disabled before they can dip into their retirement plans without paying a 10 percent penalty.
Rothstein says the easiest way to prove disability to the IRS is by collecting disability payments from an insurance company or from Social Security.
"That is excellent proof that you are disabled, if you're getting benefits from the government and from a private insurance carrier," he says.
quicklist: title: Health insurance premiums text: 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.
Read more on Bankrate: Evaluating a cash balance plan
"Or the best way is to have the money sent to the insurance carrier directly," he says.
quicklist: title: Death text: 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 59 1/2.
quicklist: title: If you owe the IRS text: 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.
quicklist: title: First-time homebuyers text: 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.
quicklist: title: Higher education expenses text: 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.
quicklist: title: For income purposes text: 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 59 1/2, 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.
Read this original story at Bankrate.com.
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.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.