Important Rules for Early Retirement Withdrawal
Age for Withdrawal Without Penalty
The advantage of saving money in an IRA, 401(k) or other special retirement account is that the IRS does not tax the money until you use it. That means you avoid paying income taxes on the money you put into the retirement account, which could lead to tax savings later in life when you stop working. The earliest you can withdraw from a retirement account without a penalty remains 59 1/2 years old for all taxpayers.
Amount of Penalty
The IRS imposes an additional 10 percent tax on any amount withdrawn early from a qualified retirement savings account, IRA, or 401(k) plan. This penalty is in addition to the tax you will pay on the money you added to the qualified account. For example, if you withdraw $500 at age 55, you pay an additional $50 in taxes to the IRS when you file the following year.
The IRS allows for several exceptions to the early withdrawal rule, but they cover very specific situations. The 10 percent rule does not cover non-taxable withdrawals, which include withdrawals of your cost for participating in the retirement plan. If you paid taxes on contributions you made earlier in the plan, those amounts are not subject to the 10 percent penalty. Rollovers, or transfers, from one qualified account to another made within 60 days are not subject to income taxes nor the 10 percent penalty. For instance, if you take $100 away from one account and then deposit that money into another qualified account 25 days later, you do not pay taxes on that amount.
Life Change Exceptions
The IRS allows for several exceptions due to changes in life circumstances. If you end your service with your employer after age 55, or after age 50 if you work for certain public service entities, you may withdraw from non-IRA qualified plans early without an additional penalty. Unreimbursed medical expenses you claim as itemized deductions on your taxes, when they amount to greater than 10 percent of your income, allow you to withdraw from a qualified retirement plan early without penalty. Distributions made to you beneficiaries upon your death do not have an extra 10 percent tacked onto them. If you become permanently and totally disabled, the early withdrawal penalty does not apply.
Over several years, American taxpayers may save money in special retirement plans and withdraw from them when they reach a certain age. Usually, a penalty occurs when someone withdraws money from these accounts early. Exceptions to the early withdrawal penalty do exist. Learn the rules regarding early withdrawal from your retirement plan thanks to this handy guide.
Discuss the benefits versus disadvantages of early withdrawal of funds from a retirement plan with your financial adviser or accountant. Sometimes, you may need the money in a pinch rather than after you turn 59 1/2 years old.