How To Take Money Out Of Your Retirement Plan And Avoid The 10% Penalty Tax
Most people know that if they take money out of an IRA before
turning age 591/2, they have to pay a 10% penalty tax on the
money. But did you know that there are actually some
exceptions to the tax code? If you follow them to the tee,
you can pull money out of your retirement account and avoid
the 10% penalty tax. Here's how;
If you have a short-term need for money, you can use the 60
day roll-over rule. If you pull money out of an IRA and
redeposit the money within 60 days, the money isn't
considered taxable income and don't have the 10% penalty
tax. You can only do this one time every 12 months, so you
need to keep good records to make sure you don't take more
than 1 distribution in any 12 month time period.
If you have money in an employer sponsored retirement plan
like a 401k or 403b, you can take your money out after age
55 without incurring a penalty tax. Here's how;
You have to separate from service with that company after
you turn 55, and then take your distribution in order to
avoid the 10% penalty tax. If you leave the company before
your actual 55th birthday, as long as you turn 55 within
that same calendar year, the 10% penalty will not apply,
because you've turned 55 the year in which you separated
But what if you don't have money in an employer retirement
plan and/or you're not yet 55 and you want to have access to
your money and will need it longer than 60 days?
Then you could tax advantage of section 72t distributions.
It allows you to set up an IRA account to take what the IRS
calls a =97 series of substantially equal periodic payments =97
those payments will then avoid the 10% penalty tax.
Payments need to run for at least 5 years or until you turn
59 =BD (whichever time period is longer). Just be warned =97 the
penalty if you don't follow these rules is severe. If you
violate the rule, all the prior years distributions are
subject to the 10% penalty tax =96 in addition to the regular
income tax you will have already paid on the distributions.
Sometimes, folks will start a 72t payment plan, and then
they come into more money/income and wind up with taxable
income that's higher than what they had originally planned
for. Then it becomes a numbers-crunching situation. Do you
stop the payments and pay the penalty tax or do you continue
the payments? Depending on your circumstances, it may make
sense to terminate the 72t payment schedule.
Whenever possible, we encourage folks not to utilize a 72t
payment schedule. You have to ensure that you maintain the
integrity of the payments to avoid paying the penalty tax
down the road, and to a degree you limit some of your
flexibility. But under the right set of circumstances, a 72t
plan can be a viable planning strategy.
Note: Please keep in mind that this article is for
informational purposes only and should not to be relied upon
as advice. It is merely a reminder that there are many
choices you have available to you, and that planning is the
only way to find the right answers for your situation! As
with any financial issues, make sure you get the right
information before making a decision! If you have any
questions, we'll be glad to help you!
About the Author:
Brian Fricke is the Author of "Worry Free Retirement, Do What
You Want, When you Want, Where You Want". For the last 6
years in a row Brian and his company =96 Financial Management
Concepts =96 have been named one of America's Top Wealth
Managers. For more information, please visit