How to Make an Early Withdrawal of Retirement Funds

You may get retirement cash early, but there are considerations.

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Consider carefully before you withdraw money early from any type of retirement fund. Not only will early distributions reduce the amount you have after you quit working, but any tax-deferred amounts are subject to regular income tax and early withdrawals may incur an additional 10 percent penalty. These Internal Revenue Service rules apply to individual retirement accounts, 401(k) plans and similar funds. Some company-paid pension plans, however, may offer early retirement benefits and after-tax Roth programs generally do not have tax penalties.

Step 1

Check with your plan administrator or review your retirement fund documents to see what is required for an early withdrawal; not all retirement funds allow early withdrawals. Decide how much you need or want to withdraw and calculate any tax consequences, such as a 10 percent penalty for withdrawing before age 59 1/2 from an IRA.

Step 2

Set up a "substantially equal periodic payment" plan, if your plan allows this distribution. Calculate withdrawals using an IRS formula based on the amount in your retirement plan and your life expectancy. Schedule payments to last at least five years or until you are 59 1/2, whichever is later. Escape the 10 percent penalty with this withdrawal, but pay taxes at ordinary income rates.

Step 3

See if you qualify for any exceptions to withdrawal penalties, such as "separation from service" for 401(k) plans for any job termination after age 55. Get a medical certification if you claim an exception for disability or add up your medical expenses for one tax year to see if you reach the limit of 7.5 percent of taxable income. Do not try to claim an educational exception for a 401(k) because that applies only to IRAs. Don't try to take out more than $10,000 for a first-time home purchase.

Step 4

Have your plan administrator transfer the funds to you, with any required withholding for taxes or penalties. Report the amount you withdraw on a Form 1040 tax return and attach a Form 5329. Complete the Form 5329 to show how much you withdrew, the type of retirement fund you tapped and to calculate the amount of tax you owe.