Taking an Early Withdrawal from Your Retirement Plan

Taking an Early Withdrawal from Your Retirement Plan

Preparing for retirement is a crucial part of planning for your future. There are many ways to save, but what happens if you end up needing that money sooner than retirement? Life can throw curve balls, so even though it is not a strategy we recommend if you can avoid it, we want to share what you need to know about taking an early withdrawal from your retirement plan.

Additional Taxes

Generally, once you are 59½ years old, you may begin withdrawing from your retirement plan. Doing so earlier is considered an “early” withdrawal. The IRS charges a 10% penalty on early withdrawals from most qualified retirement plans.

Of course, there are exceptions to the 10% penalty rule. You can make an early withdrawal from a 401(k) to pay for higher education costs, up to $10,000 towards your first home purchase, and even for health insurance premiums paid while unemployed.

Nontaxable Withdrawals

There are two occasions when you don’t have to worry about the 10% penalty.

First, if you paid the tax before putting money into a retirement plan (a non-deductible contribution), you can withdraw those funds with no tax penalty. Second, there is no penalty when doing a rollover. A rollover happens when you take money out of a retirement plan and put it into a different retirement plan. In that case, you have 60 days to get the money into a new account.

If you need assistance determining whether an early withdrawal is subject to additional tax, or whether it’s the right choice for you, be sure to contact your hb&k advisor before taking action!