by Richard E. Reyes, CFP
There ae certain exceptions to taking distributions from your retirement accounts before age 59 1/2. First, the general advice is do not do this, unless you have a detailed plan which enables you to have enough funds in retirement even after tapping your 401k early. It is usually not a good idea to remove funds early. Now, with that advice out of the way, the answer is yes, you can withdraw funds from your retirement accounts without any penalty before age 59 1/2. You WILL pay income tax on the amount withdrawn as ordinary income.
As we all already know, there is a 10% penalty if you withdraw money from your retirement assets like IRA’s, 401k’s and 403b’s before age 59 1/2. Although some exceptions may apply today we will concentrate on two. One which is commonly known called the 72(t) distribution (SEPP) and the other which is often ignored which is the “age 55 exception” from 401(k) (or 403(b)).
WARNING: IN ORDER TO USE EITHER ONE OF THESE WITHDRAWAL STRATEGIES YOU MUST OBTAIN THE SERVICES OF A HIGHLY QUALIFIED CERTIFIED FINANCIAL PLANNER. IMPLEMENTING THESE STRATEGIES INCORRECTLY WILL HAVE MAJOR NEGATIVE IMPLICATIONS.
72t. or SEPP (Substantially Equal Periodic Payments)
The substantially equal periodic payment exception or 72(t) is available to anyone with a 401k plan or IRA, regardless of age, which makes it an attractive escape hatch. In a 72(t) withdrawal, the distributions must be “substantially equal” payments based upon your life expectancy. Once the distributions begin, they must continue for a period of five years or until you reach age 59½, which ever is longest.
While 72(t) distributions sound great, there are some negative factors involved. For most people, the payments will be a fixed amount. If the plan is modified after it is set up, the account holder will face serious consequences.
Age 55 exception from 401(k)’s
The age 59½ distribution rule says any 401(k) participant may begin to withdraw money from his or her plan after reaching the age of 59½ without having to pay a 10 % early withdrawal penalty.
There is an exception to that rule, however, which allows an employee who retires, quits or is fired at age 55 to withdraw without penalty from their 401(k) (or 403(b)).
There are three key points early retirees need to know. First, this exception applies if you leave your job at any time during the calendar year in which you turn 55, or later, according to IRS Publication 575.
Second, if you still have money in the plan of a former employer and assuming you weren’t at least age 55 when you left that employer, you’ll have to wait until age 59½ to start taking withdrawals without penalty.
Third, this exception only applies to funds withdrawn from a 401(k) (or 403(b)). IRAs operate until different rules, so if you retire and roll money into an IRA from your 401k before age 59½, you will lose this exception on those dollars.
These two exceptions are only relevant if you are younger than 59½, since there is no penalty for withdrawals over this age.
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Wealth and Business Planning Group, LLC (The Financial Quarterback™) is a Registered Investment Advisor in the State of Florida that provides Fee Planning and Asset Management. Depending on your state of residence, Wealth and Business Planning Group, LLC (The Financial Quarterback™) may not be able to immediately provide services. For more information go to www.thefinancialqb.com. Richard E. Reyes, CFP is an Investment Advisor and President of Wealth & Business Planning Group, LLC (The Financial Quarterback™).