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Withdrawing money from a retirement plan before retirement is something that many people consider at some point. The circumstances in which it is allowed are limited. And even if you can do it, it may not be a good idea. Few people want to work until the day they die, and saving enough for retirement takes time and dedication. When you withdraw early, you are not just losing the amount you take out, but you are also losing all of the earnings it would have brought you over time. However, you may be in a position where you feel that you have no other way to avert financial disaster. The information below discussed the rules on withdrawing from different types of retirement funds.
Once you reach 59½ , you can take withdrawals from these accounts penalty-free, regardless of whether you are working (although plan administrators can elect to not allow current employees to take withdrawals). You must pay regular income taxes on withdrawals.
Penalty-free withdrawals before 59½ are allowed under the following circumstances:
Hardship withdrawals are permitted in limited situations of immediate and severe financial need if you cannot obtain the money from elsewhere. A penalty of 10% of the withdrawal amount is assessed. Acceptable expenses the funds can be used for include:
You can also cash out your retirement plan when you leave your job, regardless of your financial circumstances, but you will have to pay the 10% penalty unless you meet one of the non-penalty conditions.
Note: The above information only describes the rules set by the IRS. Employers are not required to allow their employees to take withdrawals. Contact your plan administrator for the specific terms governing your 401(k) or 403(b).
Like with 401(k)s and 403(b)s, you can make withdrawals penalty free once you reach 59½. Regular income taxes are assessed on all withdrawals.
A withdrawal before age 59½ is considered an early distribution and subject to a 10% penalty unless the money is used for one of the following:
Also, a penalty is not assessed if you:
No ordinary income taxes or penalty is assessed on qualified distributions. In order for a distribution to be qualified, it must meet two conditions:
How other withdrawals are treated depends on what you are withdrawing. According to the IRS’s ordering rules, withdrawals first must be taken from your regular contributions, then, if that is exhausted, conversion contributions, then earnings.
Regardless of the circumstance, you do not have to pay income taxes or a penalty on distributions that are a return of your regular contributions.
You do not have to pay income taxes or a penalty on conversion contributions withdrawn after the five-year mark. For withdrawals before then, no regular income taxes are owed, but you have to pay a 10% penalty unless you meet either one of the criteria for a qualifying reason or one of the following exceptions:
Non-qualified withdrawals of earnings are subject to a 10% penalty and regular income taxes unless one of the qualifying reasons or exceptions is met. In this case, the penalty is waived but not the income taxes.
* This publication is only intended to be used for general informational purposes. Consult a tax professional for personal advice.
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For a no-cost consultation, contact a CFS* Investment Representative by phone or email.
* Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. UFCU has contracted with CFS to make non-deposit investment products and services available to credit union members.
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