Withdrawing Money from Retirement Accounts

Withdrawing Money from Retirement Accounts

Penalties for early withdrawal before age 59.5

Borrowing against retirement accounts

Hardship withdrawals

Withdrawing money penalty-free before age 59.5

Must begin to withdraw money after age 70.5

Penalties for early withdrawal before age 59.5

Generally, if you try to withdraw money from a retirement account (401(k), IRA, 403(b) etc.) you will have to pay :

Income taxes of up to 39.6 percent immediately on the amount withdrawn

An additional 10 percent federal tax penalty

There are ways to avoid the 10 percent penalty tax, but you'll have to pay income taxes on amounts withdrawn in most cases

An exception

If the withdrawal constitutes an after-tax contribution that was nondeductible to begin with

Borrowing against retirement accounts

Varies among the various retirement accounts

• You can't borrow against IRA assets
• You can borrow against 401(k) assets if the specific plan permits it

You can borrow against your 401(k) if your plan permits it

Details vary from plan to plan

Plans aren't required to allow you to borrow against your balance

If your plan allows it, you can generally borrow 50 percent of your account balance, up to $50,000

Interest generally is paid to your account

Loans must generally be repaid within five years -- except for loans for home purchases

Any money not repaid within five years is treated as a distribution subject to income and penalty taxes

Generally can borrow money for any reason -- doesn't have to be a hardship

But don't foolishly squander your retirement money

Your spouse must sign consent form allowing you to borrow against account assets

Hardship withdrawals

Details vary from plan to plan

IRA and 401(k) rules are somewhat different

Generally withdrawals for death, medical and disability reasons are free from penalty taxes

For 401(k) plans (not IRA plans)

The plan administrator often determines if there's really a "hardship"

Administrator may require proof that you have exhausted all other financing sources

401(k) is a company-sponsored retirement plan, so you can't just get at money if you want it

This is unlike an IRA which allows you access to your money at any time, albeit with a possible tax penalty

Withdrawals for "hardships" like buying a home or funding college require payment of 10 percent penalty tax

If you're past age 55 you can avoid the penalty tax if you're already retired

Withdrawing money penalty-free before age 59.5

You can avoid the 10 percent penalty tax if you draw down your IRA or 401(k) assets with an annuity

The annuity is a set of roughly equal distributions from your account paid out over several years

Distributions must continue for at least 5 years or until age 59.5

Size of annual distribution based on age

The older you are, the larger your annual distribution

Unless you have lots of money in your account, this method won't give you a large stream of annual payments

Must begin to withdraw money after age 70.5

The government won't allow your savings to grow tax-deferred forever

After age 70.5 you must begin to withdraw money in your retirement accounts

There's a 50 percent penalty tax if you don't withdraw the required minimum amount

If your retirement account is large, you can save in taxes by selecting the right beneficiaries for your retirement account