When you have been saving for and planning retirement for years, a sudden termination from your job when you are close to retirement can take you by surprise, and may leave you wondering what to do next. If you have accumulated substantial assets in your retirement plan, you may be able to just begin using that money for living expenses and begin your retirement early. Usually, the age that you can withdraw from your retirement funds without penalties is 59 1/2, but some exceptions exist to this rule.
Employer Plan - Separated from Employment
If you separate from your employer in the year that you reach age 55 or later, you receive a special exemption to the usual rule about employer retirement plan withdrawals. In this situation, you can withdraw from your employer plan, such as a 401(k), without paying the usual 10 percent penalty for early withdrawals. If your money is invested in a traditional 401(k) on a before-tax basis, you still will be responsible for the taxes on your withdrawal at normal income tax rates.
A traditional individual retirement arrangement account is different from employer-sponsored plans concerning withdrawals. The provision for separation from your employer does not exist with an IRA. If you withdraw money from a traditional IRA before you reach age 59 1/2, you will pay a 10 percent penalty, as well as taxes at your normal income rate, on any withdrawals from your account. If you made non-deductible contributions to your traditional IRA, some of your withdrawals may be tax-free.
All contributions to a Roth IRA are after-tax contributions, and you can withdraw your Roth contributions at any time without tax or penalty. You will owe taxes and penalties on withdrawals of the interest or investment gains if you withdraw them before age 59 1/2, or if the account has been open for less than 5 years. No special exception exists if you lose your job at age 55.
Substantially Equal Payments
With an IRA, you can arrange to take substantially equal payments from your account for a period of 5 years, or until you reach age 59 1/2, whichever is longer. You calculate the amount of your withdrawal by dividing the balance of your account by your life expectancy or joint life expectancy according to IRS tables. At age 55, your life expectancy is 29.6 years. If you have a $500,000 balance in your IRA, you must withdraw $16,892 each year for 5 years. You are responsible for the taxes on this amount, and if you vary or change your withdrawals, you will be responsible for the 10 percent penalty for early withdrawals on the entire amount you withdraw.