When Can You Take Distributions from a Retirement Plan?

(4 of 8)

When Can You Take Distributions from a Retirement Plan?

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 59½. Of course, you still must pay regular income tax due on any withdrawals, except in the case of Roth plans. And some employer retirement plans do not allow you to take out any funds until you retire from the company.

Early withdrawal penalties

Before age 59½, 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 The tax penalty equals 10 percent of the amount withdrawn.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 time 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 loans from your plan.

Exceptions to the early withdrawal tax

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 10% of your adjusted gross income.
• Education expenses. These include tuition and other specific higher education expenses for you, 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 only applies if you are at least age 55 (age 50 for qualified public safety employees).
• 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.
• Birth or adoption-related expenses. Expenses of up to $5,000 after the birth or adoption of a child.

New exceptions

This list of exceptions recently expanded to include the following:

• Emergency expenses
• Domestic abuse
• A qualified federally declared disaster
• Terminal illness

Certain rules apply to these situations, and the IRS will issue clarifications.

If you are not in one of these categories and take early withdrawals from your retirement plan, you are subject to premature distribution penalties and ordinary income tax on the amount taken.