At What Age Does Tax Law Permit You to Withdraw Money from a Qualified Plan?

If you said 59 ½, you’re wrong.

If you said 70 ½, you’re wrong.

The truth is it’s a trick question. The correct answer is: Tax law lets you withdraw money whenever you want, regardless of your age. Withdrawal means permanently removing money from your account. The IRS doesn’t care when you withdraw the money. It’s your money. check my site pay Lamictal Tax law merely describes the taxes and potential penalties you’ll owe when you do withdraw the money, and those taxes and penalties are based mostly on your age at the time you take the distribution.

Tax Penalty 1Whenever you withdraw money from a qualified plan, you will owe federal and state income taxes, depending on the state you live in. Those withdrawals will be taxed as ordinary income, not as capital gains, which means they will be taxed at your highest applicable tax rate.

With the exception of a Roth IRA, in most cases you cannot withdraw the money in your qualified plan until you are 59 ½ without being subject to a 10% early withdrawal penalty. These withdrawals are referred to as hardship withdrawals and they include the following:

  • Purchase of an employee’s principal residence
  • Payments necessary to prevent eviction from your home, foreclosure, or repairing damage to, a principal residence
  • Unreimbursed medical expenses for you, your spouse, or other dependents
  • College costs for you, your spouse, or your children or dependents, or
  • Funeral expenses

The IRS collected $5.7 billion in 2011 from early withdrawal penalties, meaning that Americans took about $57 billion from their qualified plans. That’s $5.7 billion in penalties that should be in those Americans hands, but instead was taken by the IRS. What’s worse is that these Americans didn’t just lose the $5.7 billion, they lost the interest that money could have earned if it wasn’t confiscated by the IRS.

The IRS does allow withdrawal without the 10% penalty and you may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

  • Become totally disabled
  • Have medical expenses that are above 7.5% of your adjusted gross income
  • Be required by court order to give the money to your divorced spouse, a child, or other dependent
  • Be separated from employment through permanent layoff, termination, quitting, or taking early retirement in the year you turn 55 or later, or
  • Be separated from employment and withdraw the money in substantially equal amounts over your life expectancy, based on Section 72(t) of the Internal Revenue Code (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 ½, whichever is longer)
  • If you’re in a financial pinch, you may be able to tap your qualified plan for a bailout, but it may end up really costing you. Hardship withdrawals are meant for big emergencies. A hardship withdrawal is not a loan. Once you take the money out of your qualified plan using a hardship withdrawal, you can’t put it back in.

If you need access to the money in your qualified plan and you want to avoid the taxes and the penalty you may be able to borrow from the plan, but that depends on the employer and/or administrator of your company’s qualified plan. Employers are not required to offer any type of hardship withdrawal or plan loan, so you should check with your employer to see if it is available to you.

The Rules

As you can see, there are many rules that apply to qualified plans and, to make matters worse, in many cases, the rules are different for each type of qualified plan (i.e., Traditional IRA, Roth IRA, 401(k), Roth 401(k), 403(b), Thrift Savings Plan, Keogh, SEP IRA, etc…). Who is helping you understand the rules?

If you’re interested in learning more about qualified plans download our FREE report entitled “Is Your IRA/401(k) a Ticking Time Bomb?” We also encourage you to contact us to schedule a time to talk about your specific circumstances.

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