Introduction to Retirement Withdrawals

Of course, the goal in carefully planning and contributing to retirement plans is to someday take out your money, as well as the earnings that have grown in the tax-sheltered account. People generally withdraw funds from their retirement plans after they retire, when they often are in a lower tax bracket. Sometimes, however, people face unplanned financial needs—such as a job loss or divorce—and need to take a distribution from their plan before retirement. How to handle these and other types of distributions is also an important consideration when developing a retirement plan.

Since a retirement plan is for retirement, there are important income tax considerations you need to take. Withdrawals or distributions prior to your normal retirement (usually after age 59½) may have untoward income tax consequences. So plan to avoid raiding your retirement plan for emergency funds.

You also need to consider when you will start drawing on your retirement plan funds. Generally putting that off saves taxes, but be aware that there comes a time when you must take required minimum distributions or face severe tax penalties.

While you don’t have to decide how you will take your distributions when you first contribute to a retirement plan, you should make yourself aware of the various distribution options that your plan has so you can plan for the most advantageous options when the time comes.

Knowing how your retirement plan works will help make you a better investor.