What If I Need to Take an Early Withdrawal?

It’s a common question: I’ve been saving for retirement for years now, but hard times have hit. I need to withdraw some of my money. Will I be penalized? When you decided to invest in certain tax-deferred retirement plans, you were most likely informed that there might be penalties for withdrawing any money before age 59 ½. Luckily, in certain situations this penalty will not apply*, though the rules can be a little different between IRAs and employer-sponsored retirement plans.

Death. If you die before age 59 ½, your beneficiaries can take distributions from your IRA account, according to annual required minimum distributions.

Disability. Under certain conditions, depending on the type of account, you may be able to take distributions without the tax penalty if you are disabled.

Medical Care. If you have an IRA, you can withdraw any amount you paid for unreimbursed medical expenses, if it exceeded 10 percent of your adjusted gross income (AGI) for the year. Those over 65 can withdraw any amount that exceeds 7.5 percent of AGI. Under employer-sponsored plans, you can withdraw the amount allowable as a medical expense deduction. Check the rules of your plan and your tax return carefully.

Medical Insurance. You can withdraw IRA funds to pay for medical insurance if you lose your job.

College tuition. If you need to pay college tuition for yourself or dependents, you may withdraw funds from your IRA.

Home purchase. Under IRA rules, you can withdraw up to 10,000 dollars to purchase a home. This is a one-time allowance.

Part of a SEPP plan. You may schedule Substantially Equal Periodic Payments over the term of your life expectancy, or the combined life expectancy of yourself and a beneficiary. Pay schedules are subject to certain rules, and if you change your payment schedule after beginning payments you may have to pay the 10 percent penalty.

Qualified Domestic Relations Order. Your employer-sponsored plan may make payments to an alternate payee under a QDRO.

Reduce excess contributions. If your contributions went over the yearly limit, you may be able to withdraw that amount without penalty.

Reduce excess elective deferrals. Under employer-sponsored plans, if you deferred an amount over the allowable limit, you may be able to withdraw that same amount without paying a penalty.

*Discussion of tax topics is general in nature should not be construed as tax or legal advice. Please consult your attorney or tax professional regarding your specific situation.

Securities and Advisory Services offered through Client One Securities, LLC Member FINRA/SIPC and an investment advisor. Sawyer Wealth Management and Client One Securities, LLC are not affiliated.
The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.