Early Withdrawal From Retirement Savings Plans

Early withdrawal of retirement savings can bring costly fees and penalties.

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Withdrawing funds from your retirement savings plan before you've reached the age of 59 1/2 can result in costly fees and penalties. However, there are some exceptions that cover your 401(k), 403(b), or individual retirement account.

Know Your Plan

Before determining whether to withdraw money early from your retirement savings account, you should know exactly what type of plan you have. The most common are IRA, 401(k), and 403(b) plans. The Internal Revenue Service has rules that govern each.

Avoid Fees and Penalties

Because contributions to traditional IRA, 401(k), and 403(b) plans are not taxed when they are made, the IRS imposes penalties if you withdraw from them before age 59 1/2. If you simply withdraw funds before that and place them in your checking account, you will owe taxes on the money and will have to pay a 10 percent penalty on the taxable amount. Simple IRAs can incur taxes of 25 percent. However, there are exceptions.

Exceptions for Early Withdrawal From an IRA

If you have a traditional IRA, there are some scenarios in which you would not incur early withdrawal penalties: if you roll over funds directly into a new retirement account, if you received a payment but rolled over the money within 60 days, if you were totally disabled permanently, if you were unemployed and paid for health insurance premiums, if you paid for college expenses for yourself or a dependent, if you bought a house, if you paid for medical expenses exceeding 7.5 percent of your adjusted gross income, or if the IRS used your retirement account to pay off tax debts.

Exceptions for Early Withdrawal From a 401(k) or 403(b)

There are also exceptions if you withdraw from your 401(k) or 403(b) plans: if you take distributions upon death or permanent disability, if you leave your job or retire from it when you reach 55 or older, if you receive the distribution as equal payments throughout your lifetime, if the withdrawal was required through a divorce or separation agreement, or if you paid for medical expenses exceeding 7.5 percent of your adjusted gross income.