How to Withdraw Retirement Money Early
Check the types of plans you have., Evaluate your reason for needing to withdraw early., Consider your age., Gather documentation., Contact your financial advisor.
Step-by-Step Guide
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Step 1: Check the types of plans you have.
While there are limited exceptions that enable you to withdraw retirement funds early without any tax penalty, many of these exceptions only apply to money held in particular types of accounts.The type of plan you have also determines the earliest age at which you can withdraw retirement money without penalty, and whether you must first leave your job.
Some plans are never subject to early withdrawal penalties, such as employee stock ownership plans.
These plans often share similar features with traditional retirement plans, but dividend distributions from these plans are penalty-free.
Many exceptions, such as withdrawing money to purchase your first home or to pay for college expenses, only apply if your account is a traditional IRA.
The same exceptions that apply to traditional IRAs also apply to Roth IRAs that have been open for fewer than five years.If you have a Roth IRA, you don't have to pay either ordinary income taxes or the 10 percent penalty on early withdrawals, provided the withdrawal constitutes a return of your regular contributions.
The IRS requires withdrawals come first from your regular contributions, then conversion contributions, then earnings. -
Step 2: Evaluate your reason for needing to withdraw early.
In some specific situations, such as disability or extensive medical bills, you can withdraw retirement money early without having to pay any additional taxes apart from basic income tax.For example, if you have medical expenses that exceed
7.5 percent of your adjusted gross income, you can withdraw retirement money to pay those expenses.
Note that this exception is set to expire on December 31,
2016.
However, keep in mind this exception only applies to expenses that would be tax-deductible, and you must pay the expenses in full.
If you withdraw more money than is necessary to cover tax-deductible medical expenses, you may have to pay the 10 percent additional tax on the excess funds.
You can pay child support or alimony from your retirement funds without paying the early distribution tax if the court has entered a qualified domestic relations order.
However, this exception does not apply to early withdrawals from an IRA.
If you have retirement money in a traditional IRA, you can withdraw up to $10,000 without penalty to purchase your first home.
You also may withdraw money early from an IRA to pay for higher education expenses, provided those expenses are paid for your own education or on behalf of your spouse, child, or grandchild. , If you are over
59.5 years of age, you typically can withdraw money from your retirement accounts without penalty even if you're still working.
However, you also may have the option of withdrawing from your retirement accounts at any age if you can structure substantially equal periodic payments.Withdrawing retirement money early using substantially equal periodic payments is an option for people with IRAs and some other retirement plans.
However, if you have a 401(k) you typically must no longer be working for the employer that sponsored the plan.
If you are between the ages of 55 and
59.5, you can withdraw your money early without penalty if you've left your job.
You only have to terminate your employment with the employer that sponsored the plan – you don't have to retire completely or permanently.
However, the age-55 exception does not apply to withdrawals from traditional IRAs. , If you've determined that one of the exceptions applies and you're eligible to withdraw retirement money early without penalty, you will need documentation to present to your financial advisor or plan administrator to prove that your reason for needing the money falls into that exception.For example, if you're withdrawing funds to pay child support or alimony pursuant to a qualified domestic relations order, you typically must provide a copy of the court's order to the investment company that administers your account.
If you need to withdraw money from your retirement accounts early as a result of disability, you must be able to prove that you are permanently and totally disabled to avoid paying additional taxes.
Your disability must have been declared permanent before you withdrew funds, regardless of the severity of your condition. , Once you've made your final decision on the account from which you want to withdraw money, your financial advisor or plan administrator can assist you in filling out the documents you'll need to set your plan in motion and get your money.Be prepared to make your case to your financial advisor as to why you need to withdraw money from your retirement account early.
Even if you qualify for an exception, investment professionals typically advise against withdrawing retirement money early unless it is truly the only option you have available.
An investment professional also can assess and confirm that your situation actually falls into an available exception from the 10 percent early-withdrawal tax, as well as let you know what documentation you will need to prove that you're entitled to the exception. -
Step 3: Consider your age.
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Step 4: Gather documentation.
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Step 5: Contact your financial advisor.
Detailed Guide
While there are limited exceptions that enable you to withdraw retirement funds early without any tax penalty, many of these exceptions only apply to money held in particular types of accounts.The type of plan you have also determines the earliest age at which you can withdraw retirement money without penalty, and whether you must first leave your job.
Some plans are never subject to early withdrawal penalties, such as employee stock ownership plans.
These plans often share similar features with traditional retirement plans, but dividend distributions from these plans are penalty-free.
Many exceptions, such as withdrawing money to purchase your first home or to pay for college expenses, only apply if your account is a traditional IRA.
The same exceptions that apply to traditional IRAs also apply to Roth IRAs that have been open for fewer than five years.If you have a Roth IRA, you don't have to pay either ordinary income taxes or the 10 percent penalty on early withdrawals, provided the withdrawal constitutes a return of your regular contributions.
The IRS requires withdrawals come first from your regular contributions, then conversion contributions, then earnings.
In some specific situations, such as disability or extensive medical bills, you can withdraw retirement money early without having to pay any additional taxes apart from basic income tax.For example, if you have medical expenses that exceed
7.5 percent of your adjusted gross income, you can withdraw retirement money to pay those expenses.
Note that this exception is set to expire on December 31,
2016.
However, keep in mind this exception only applies to expenses that would be tax-deductible, and you must pay the expenses in full.
If you withdraw more money than is necessary to cover tax-deductible medical expenses, you may have to pay the 10 percent additional tax on the excess funds.
You can pay child support or alimony from your retirement funds without paying the early distribution tax if the court has entered a qualified domestic relations order.
However, this exception does not apply to early withdrawals from an IRA.
If you have retirement money in a traditional IRA, you can withdraw up to $10,000 without penalty to purchase your first home.
You also may withdraw money early from an IRA to pay for higher education expenses, provided those expenses are paid for your own education or on behalf of your spouse, child, or grandchild. , If you are over
59.5 years of age, you typically can withdraw money from your retirement accounts without penalty even if you're still working.
However, you also may have the option of withdrawing from your retirement accounts at any age if you can structure substantially equal periodic payments.Withdrawing retirement money early using substantially equal periodic payments is an option for people with IRAs and some other retirement plans.
However, if you have a 401(k) you typically must no longer be working for the employer that sponsored the plan.
If you are between the ages of 55 and
59.5, you can withdraw your money early without penalty if you've left your job.
You only have to terminate your employment with the employer that sponsored the plan – you don't have to retire completely or permanently.
However, the age-55 exception does not apply to withdrawals from traditional IRAs. , If you've determined that one of the exceptions applies and you're eligible to withdraw retirement money early without penalty, you will need documentation to present to your financial advisor or plan administrator to prove that your reason for needing the money falls into that exception.For example, if you're withdrawing funds to pay child support or alimony pursuant to a qualified domestic relations order, you typically must provide a copy of the court's order to the investment company that administers your account.
If you need to withdraw money from your retirement accounts early as a result of disability, you must be able to prove that you are permanently and totally disabled to avoid paying additional taxes.
Your disability must have been declared permanent before you withdrew funds, regardless of the severity of your condition. , Once you've made your final decision on the account from which you want to withdraw money, your financial advisor or plan administrator can assist you in filling out the documents you'll need to set your plan in motion and get your money.Be prepared to make your case to your financial advisor as to why you need to withdraw money from your retirement account early.
Even if you qualify for an exception, investment professionals typically advise against withdrawing retirement money early unless it is truly the only option you have available.
An investment professional also can assess and confirm that your situation actually falls into an available exception from the 10 percent early-withdrawal tax, as well as let you know what documentation you will need to prove that you're entitled to the exception.
About the Author
Catherine Roberts
Brings years of experience writing about pet care and related subjects.
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