How to cash in retirement funds early - without paying the penalty

Q: What's the least expensive way to cash in retirement IRAs early for use in meeting living expenses? I have $27,000 in managed mutual funds, and it's decreasing daily. Is it cheaper to withdraw everything at once, or in bits (assuming employment for educated women over 50 becomes available)?
- P.B., via e-mail

A: There are precious few ways to take early distributions from retirement accounts without incurring a 10 percent penalty, says Bobbie Munroe, a certified financial planner in Atlanta. Two that might apply in your case if the account is an IRA:

1. Any amount used to pay health insurance premiums is exempt from the penalty. This exception applies only if you have applied for unemployment.

2. Any other medical costs that would be deductible on Schedule A of your tax return to the extent that they exceed 7.5 percent of your adjusted gross income. This exception applies even if you don't itemize deductions.

Even if your distributions avoid the penalty, you will still owe income tax on them. Depending on transaction costs assessed by your account manager, you may want to limit your annual distribution to the smallest amount you think you might need. You can take another distribution in 2005, which would be taxable next year rather than this year.

You should consider such moves carefully, Ms. Munroe says. What's spent today won't be available later.