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When Can You Take Distributions from a Retirement Plan?

When exactly can you take distributions from your retirement plan without incurring penalty taxes? You can make penalty-free distributions from your retirement plan after you are of age 59½. Of course, you still must pay regular income tax due on any withdrawals, except in the case of the Roth IRA. And some employer retirement plans do not allow you to take out any funds until you retire from the company.

Before age 59½, you may have to pay a penalty tax on early withdrawals, in addition to the regular taxes you owe on these distributions. The penalty tax equals 10 percent of the taxable amount withdrawn. However, the early withdrawal tax does not apply if you take out funds and roll them over or directly transfer them to another retirement plan, or if you meet certain requirements for exceptions to premature withdrawal rules.

At some time during your career, you may face a financial need and decide to meet it by taking money from your retirement plan. Check first with your employer or plan provider; some employer retirement plans enable you to receive loans or hardship distributions from your plan.

Some retirement plans have exceptions to the rules regarding the early withdrawal penalty. Check to see whether you meet any of the allowable exceptions to the early withdrawal tax:

  • Dividends from employee stock ownership plans (ESOPs). — These are never subject to the early withdrawal tax, regardless of your age.
  • Substantially equal periodic payments — You receive equal payments from the plan over your expected lifetime or the expected lifetime of you and your spouse.
  • Medical expenses — Certain medical expenses are exempt from the early withdrawal tax if they exceed 7.5 percent of your adjusted gross income.
  • Education expenses — These include tuition and other specific higher education expenses for you, your spouse, children, or grandchildren.
  • First-time home purchase — Again, the home can be purchased by you, your spouse, or certain other family members.
  • Plan payments from a former employer — This exception only applies if you are separated from service after attaining at least age 55.

If you are not in one of these categories and take early withdrawals from your retirement plan, you maybe subject to premature distribution penalties and ordinary income tax on the amount taken.

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This material is being provided for informational purposes only. Neither New York Life nor its agents provide legal, tax or accounting advice. Please contact your own advisers for legal, tax and accounting advice.

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When Can You Take Distributions from a Retirement Plan?

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