WHEN CAN YOU TAKE DISTRIBUTIONS FROM A RETIREMENT PLAN?
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When exactly can you take distributions from your retirement plan without incurring tax penalties? You can make penalty-free distributions from your retirement plan after you are of age 59?. Of course, you still must pay regular income tax due on any withdrawals (except for the Roth IRA). And some employer retirement plans do not allow you to take out any funds until you retire from the company.
Before age 59?, you may have to pay a tax penalty on early withdrawals, in addition to the regular taxes you owe on these distributions. The tax penalty equals 10 percent of the amount withdrawn. However, the early withdrawal tax does not apply if you take out funds and roll them over or directly transfer them to another retirement plan, or if you meet certain requirements for exceptions to premature withdrawal rules.
At some point during your career, you may face a financial need and decide to meet it by taking money from your retirement plan. Check first with your employer or plan provider; some employer retirement plans enable you to receive a loan from your plan.
Some retirement plans have exceptions to the rules regarding the early withdrawal penalty. Check to see whether you meet any of the allowable exceptions to the early withdrawal tax:
- Dividends from employee stock ownership plans (ESOPs)—these are never subject to the early withdrawal tax, regardless of your age.
- Substantially equal payments—you receive equal payments from the plan over your expected lifetime or the expected lifetime of you or you and your spouse.
- Medical expenses—certain medical expenses are exempt from the early withdrawal tax if they exceed 7.5 percent of your adjusted gross income.
- Education expenses—these include tuition and other specific higher education expenses for yourself, your spouse, children, or grandchildren.
- First-time home purchase—again, the home can be purchased by you, your spouse, or certain other family members.
- Plan payments from a former employer—this exception applies only if you are at least age 55.
- Alimony or child support payments—to qualify, these payments must be the result of a legal agreement, not a private concord.
- Payments from a qualified annuity contract—for instance, you may receive payments from an annuity purchased by your former employer.
Now, we'll discuss when you must begin making distributions from your retirement plans.