10 Penalty-Fee Withdrawal Options For Retirement Plans, #240
When it comes to retirement plans, the general rule is that you can’t access funds in your retirement account(s), without penalty, until age 59 ½. If you withdraw funds prior to 59 ½, you’ll get hit with a 10% penalty and income tax (if coming from a non-Roth account). But there are some instances in which you can make withdrawals penalty-free. We’ll dive into this in this episode of Retire with Ryan.
When it comes to retirement plans, the general rule is that you can’t access funds in your retirement account(s), without penalty, until age 59 ½. If you withdraw funds prior to 59 ½, you’ll get hit with a 10% penalty and income tax (if coming from a non-Roth account). But there are some instances in which you can make withdrawals penalty-free. We’ll dive into this in this episode of Retire with Ryan.
You will want to hear this episode if you are interested in...
[0:55] Why you should hire a fee-only financial advisor
[2:32] When can you access retirement accounts?
[3:20] Way #1: Pay for unreimbursed medical expenses
[4:18] Way #2: If you become disabled
[4:53] Way #3: Pay for health insurance premiums
[5:43] Way #4: Death
[6:23] Way #5: Pay debt to the IRS
[6:50] Way #6: First-time home buyer
[7:34] Way #7: Higher education expenses
[8:31] Way #8: Substantial and equal payments
[9:52] Way #9: Terminal illness
[10:19] Way #10: Separation of service
When can you make penalty-free withdrawals?
To pay for unreimbursed medical expenses: If you have medical bills that exceed 7.5% of your Adjusted Gross Income (AGI), you can withdraw funds from an IRA or 401K to cover those expenses.
Disability: You can take withdrawals from an IRA or 401K penalty-free if you become disabled. Remember—the IRS has specific guidelines for what qualifies as a disability.
Health insurance premiums: Penalty-free withdrawals from an IRA are available when they’re used to pay for premiums. However, you have to be unemployed for 12 consecutive weeks to qualify for this exemption.
Death: If you inherit a retirement account, and aren’t 59 ½, the 10% penalty is waived when you take distributions. However, you will be required to submit paperwork and follow specific guidelines.
Pay debt to IRS: If you’re in debt to the IRS, you can take money out of your IRA or 401K to pay them. They’ll waive the 10% penalty.
First-time home buyer: You’re able to take money out of an IRA—up to $10,000—to pay for your first home purchase. You’re allowed to do this once per lifetime.
Higher education expenses: You can take money out of an IRA to use for qualified educational expenses while enrolled. There are some things that do not qualify.
Substantial and equal payments: You have to take out substantial and equal distributions for five years—or until you turn 59 ½—whichever is greater.
Terminal illness: If you are terminally ill, you can take money from your 401K without being penalized. You have to gain certification from your physician.
Separation of Service: If you’re 55 and you leave or lose your job, you can take money out of your qualified plan and avoid the 10% penalty.
Dissecting separation of service
Let’s dig into this a bit: This provision applies if you turn 55 in the calendar year you leave/lose your job. This only applies to qualified plans. It’s one of the reasons why you might not want to rollover your 401K to an IRA upon leaving that company.
Let’s say you have $1 million in your 401K. You’re leaving your job. What are your income needs? You can leave some money in your 401K in case you need access to it. At age 59 ½ you can roll that money out to your IRA.
There are some people who can qualify for this exemption earlier than age 55. Listen to the episode to learn more!
Resources Mentioned
Subscribe to the Retire with Ryan YouTube Channel
Breaking Down the IRS’s New Finalized Regulations on Inherited Retirement Accounts
Connect With Morrissey Wealth Management
www.MorrisseyWealthManagement.com/contact