When you put money into a tax-advantaged retirement account, the Internal Revenue Service requires you to follow IRS rules when you withdraw money. If you make an early withdrawal that isn't permitted by the IRS, you will be subject to penalties. However, once you reach legal retirement age, you can withdraw as much as you want -- but after a certain point, not as little as you want -- without penalty.
Once you are 59.5 years old, you are eligible to take as much or as little as you want from your tax-advantaged retirement accounts. When you withdraw money the IRS won't levy a penalty, but you'll have to pay income tax at your marginal rate on everything you withdraw. This income tax rate applies even if you're withdrawing long-term capital gains that otherwise could have been taxed at a lower long-term capital gains rate.
Once you turn 70.5 years old, the rules change. Unless you're still working for the company that holds your 401(k) money and you aren't an owner of 5 percent or more of its stock, you have to take money out of your traditional IRA and 401(k) accounts. The IRS establishes a minimum distribution that you must take, tied to your age. You'll still be able to take out as much as you want without penalty, although you'll have to pay income tax on the withdrawal. But if you don't take at least the minimum distribution, the IRS will apply a 50 percent tax rate on the amount you should have taken. For example, if your required minimum distribution was $4,000 but you took only $2,100, you'd have to pay $950 in tax on the $1,900 that you didn't withdraw.
Early and Hardship Distributions
If you take money out of your tax-deferred savings plans before you retire, you'll have to pay your regular income tax rate on the entire withdrawal. In addition, the IRS will levy a 10 percent penalty. For example, if you withdrew $7,500 and you were in the 25 percent tax bracket, you'd pay $1,875 in tax and a $750 penalty. The IRS waives the penalty if you make an deduction for an allowed reason. The rules vary depending on whether you are pulling money out of an IRA or a 401(k), but the penalty waiver can apply to pulling out money to pay tuition, to pay medical expenses that are more than 7.5 percent of your adjusted gross income, or to put money down on a house if you are a first-time home buyer.
The rules are different for Roth IRAs, because you've already paid tax on the money that you put into your Roth. At any time, you can pull out money that you directly contributed to your Roth IRA, without paying tax or penalties on it. However, if you pull out profits that were earned in the Roth, they'll be subject to tax and a 10 percent penalty if you make that withdrawal too early. Converted or rolled-over regular IRA or employer plan funds in a Roth need to stay there at least five years for you to be able to pull them out without paying tax or penalty. If you use money from a Roth to pay for medical insurance after a job loss, you can avoid a penalty on withdrawals that otherwise would be subject to one.
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