By Jonathan Durrant, CPA

In today's sluggish economy, many people, desperate to make ends meet, are eyeing their 401(k) and IRA retirement plans.

Be cautious. A withdrawal from either should be a last resort, because they are intended for your retirement income. Plus, you'll likely be paying a hefty fee if cash them out before age 59 ½.

Let's look at the difference between the two, and the ways in which you can use them to pay recurring bills. An IRA (Individual Retirement Account) is a private investment funded by your own money, while a 401(k) is offered through your work and involves your contributions and contributions from your employer. (Keep in mind that each employer has different rules specific to their 401(k) plan, so you'll have to double check your 401(k) distribution options with your employer.)

Here are four ways in which you can use them:

Take out a Regular 401(k) loan. The good news is that both taxes and the 10 percent penalty, which you would normally have to pay if you cashed out your 401(k), do not apply – unless you default on the loan. This type of loan must be repaid within five years, unless you quit or lose your job. Then, you have 60 days to repay the loan in full. If you miss the deadline, you'll probably be hit with a 10% penalty and taxes.

Take out a Hardship distribution. The IRS has strict guidelines on when a hardship distribution is allowed. There must be an immediate and heavy financial need to qualify for this distribution. Unlike a 401(k) loan, this distribution is normally subject to both the 10% penalty and taxes.

According to the IRS, you may qualify for this distribution in the following circumstances:

• Medical expenses
• Costs directly related to the purchase of a home
• Payment of tuition/school expenses
• Payments necessary to prevent eviction
• Funeral expenses
• Certain expenses for the repair of damaged house

Traditional IRA Distributions. There are no qualifications to take a distribution from an IRA account. Distributions can occur at any time. However, just like a hardship distribution, these are normally subject to both the 10% penalty and taxes.

Roth IRA Distributions. Just like the Traditional IRA Distribution, there are no qualifications to take a distribution. Distributions can occur at any time. Plus, there generally is no tax or 10% penalty as long as you only distribute up to the amount of your contributions. This means if you make a $5,000 contribution, and later decide that you need to make a distribution, you can do so up to $5,000 without any additional taxes. If you make a distribution for more than you contributed, you are pulling out earnings, which are potentially subject to tax and the 10% penalty.

There are many exceptions to the early withdrawal penalty, depending on whether the distribution is from an IRA or a 401(k). If you don't qualify for an early withdrawal penalty exception, you can still withdraw retirement funds. However, remember that early distributions are taxed at 10 percent plus normal taxes and, bottom line; you'll have less money to live on when you retire.

This is but a summary on 401(k) and IRA distributions. For answers to specific questions on the pros and cons of withdrawing retirement monies, please call the Leverich Group at 801-364-4949.