You want penalty-free retirement withdrawals as much as the next day right?
If you invest in various plans such as IRA and 401(k), then you would know that for tapping a 401(k) free of the 10% early withdrawal penalty, you have to be at least 59½ years of age. But what if you want to retire earlier than that, say by the age of 55, and still be able to take out penalty-free distributions? The good news is you can. Are the ‘hows’ and ‘whens’ already running through your mind? The following points will answer all your questions.
The one exception to being able to tap into your retirement savings early and not paying any penalty on the withdrawals is that you have to leave your employer in the year you turn 55 or older. If you do so, you can take distributions from your 401(k) without penalty but you would still owe tax on the withdrawals. For example, you have to pay $2,500 on a $10,000 payout at a 25% tax rate but you will avoid the 10% ($1,000 in this case) early withdrawal penalty.
It doesn’t really matter how you part ways with your employer. You can retire, get laid off or even get fired, but as long as you are 55 years by the end of the year you leave the job, the rule will apply. If you leave your job in January and turn 55 in December, then the 401(k) or 403(b) payouts anytime during the year are penalty-free. However, if you retire in December and turn 55 the following January, you will be stuck with the penalty until you turn 59½ years.
Plans Supporting this Exemption
It is important to remember that this exemption is only applicable to the funds in your 401(k) and 403(b) accounts. You must already be familiar with the former, let’s take a quick peek into the latter.
403(b) is a retirement plan that is created for certain employees of the non-profit sector, public school, and tax-exempt organizations and ministers. Individual 403(b) accounts are established and maintained by eligible employees. Those with the 403(b) plan have the ability to match payroll-deducted contributions, which is an employment incentive. These contributions then grow tax-free, often for decades, resulting in a significant increase in the initial investment.
If you turn 55 the year you leave your employer, you can withdraw penalty-free income through these two accounts, however if you decide to roll those funds over into an IRA after you leave your job and then want to withdraw some money, you’ll be subjected the 10% early withdrawal penalty until you turn 59½.
So, go through all your options carefully during retirement planning and choose the plan that benefits you the most. We, at SD Retirement Plans, can guide you through this process efficiently, so that you get maximized benefits from the plan.