It is possible to quit your job and collect your early retirement benefits. However, if you are contemplating quitting work before retirement age, claiming the benefits in question is not always the wisest course of action. Depending on the age at which you begin collecting retirement benefits, you may have to pay the penalty for early withdrawals. You may also struggle to make your retirement income last for the rest of your life.
What's the Difference Between Quitting and Retiring?
Retiring is the process of leaving a job after you have worked for a necessary period. Usually, you will be required to fill out paperwork to access certain benefits you are entitled to due to the work you have done, savings you have amassed and taxes you have paid during your working life.
A typical American is expected to begin working in some form from the age of about 15 years. And while the full retirement age is 67 for anyone born after 1960, most people tend to retire early. By the age of 64, most Americans will stop working. So, the typical American has about 49 years of work to save up for retirement.
On the other hand, quitting refers to the process of voluntarily leaving your job at any point during your working years. Thus, you could also be said to have resigned. However, resignation is a more formal way of leaving a job voluntarily, where you must write a resignation letter to notify your employer of your intention to stop working. Most times, you will be required to warn the employer at least two weeks beforehand.
When you quit or resign, you may end up losing the benefits associated with waiting until you reach a specified age when you can retire. And if you are still young, you will have to wait until you attain a specified retirement age to receive benefits associated with the savings you made while working in the job you quit. Alternatively, you could roll over or access some of your portable retirement plans, such as an IRA and 401(k).
Can You Get Your Retirement Money When You Quit Your Job?
From a financial perspective, it is always better to retire than to quit your job. But that’s not always possible. Some circumstances, such as disability, health issues, a toxic career and the need for a better work-life balance, may force you to stop working before you should.
However, bills still have to be paid, which means you may need to access some of your retirement money. The good news is that you don’t lose your retirement income altogether when you leave your job. But early retirement and benefits don’t always go hand-in-hand in a desirable way. So, even when you access some of your benefits, there may be financial consequences in the future.
1. Accessing Social Security After Quitting
You can access your Social Security benefits to replace some of your lifetime earnings. However, you must be eligible to access these benefits. One of the eligibility criteria are that you must be at least 62 years old to claim them.
It’s also worth noting that you must have at least 40 Social Security credits, which are equivalent to at least 10 years of work. So, if you quit your job and have worked for less than 10 years, you are not eligible for these benefits even if you have attained the age of 62 years.
Do bear in mind that your Social Security benefits are based on your monthly earnings over a 35-year period during which you earned the highest income. So, you need to know that you will receive fewer benefits if you worked for less than 35 years before quitting.
In addition, if you don’t wait until you hit the full retirement age, your benefits will be reduced even more. For example, at 62 years, you will only receive 70 percent of your benefits. And at 65 years, you may receive up to 86.7 percent of your full benefits.
However, if you stop working at 62 years but don’t collect your Social Security benefits until full retirement age, you will receive your full benefits. These will be based on your lifetime earnings. And should you choose to wait beyond your full retirement period until the age of 70 years, your benefits will increase by eight percent each year.
2. Accessing Your IRA, 401(k) and 403(b) After Quitting
There is always the option of leaving your 401(k) or 403(b) untouched after quitting your job. But you need to have at least $5,000 in the plan. You also have a right to move money from your 401(k) into an IRA after quitting your job. But if the previous employer writes a check to the company dealing with your IRA, you won’t have to pay any taxes. You can then continue saving for your retirement.
However, if you need your money in the form of a lump sum, prepare to pay taxes on the taxable retirement income. That applies to the traditional IRAs, 401(k) and 403(b) accounts funded by pre-tax dollars. The only exceptions are Roth 403(b) and the Roth 401(k).
In addition, you need to consider the matter of penalties. The typical age for withdrawing money from your IRA, 401(k) or 403(b) is 59.5 years. From then on, you can withdraw your account funds once without incurring the 10 percent penalty usually charged for early withdrawals.
Bypassing Penalties When Accessing Your Retirement Money
You may not be able to get around the income taxes you have to pay when withdrawing your retirement benefits. However, you can bypass penalties in various ways if you are determined to withdraw your early retirement benefits when you quit your job.
1. Rule of 55
The rule of 55 is one of the ways you can avoid paying the penalty when making early withdrawals from your 401(k) and 403(b) accounts.
Based on this IRS guideline, you may be able to access your early retirement benefits if you quit your job in the calendar year you turn 50 (if you are a public safety worker) or 55 (other types of employees). However, you must only withdraw funds from your current 401(k) or 403(b) accounts. And IRAs are not covered.
You can continue enjoying your money under this rule, even if you get another job.
2. Rule 72(t)
According to rule 72(t), you can withdraw funds from qualified retirement accounts such as an IRA, 403(b) or 401(k) by taking five substantially equal periodic payments (SEPPs) for five years or until you hit the age of 59.5 years, whichever is later. In this case, retirement accounts managed by a current employer are not eligible. But if you quit your job, that should not worry you.
The method by which you determine which payment plan to use must remain constant too. And these plans include the required minimum distributions, amortization or annuitization method. But it would be wise for you to consult a financial advisor to help you figure out how to access your benefits early because this rule is complex.
Final Thoughts on Retirement Benefits
While you can collect retirement benefits early after quitting your job, it may be wiser not to do so. However, if you need to use some of your benefits, employ strategies to reduce your taxes and eliminate penalties. That way, you can get the maximum possible benefits regardless of your situation.
- PR Newswire: First Time for Everything: When Should Kids Get a Job, a Phone, a Date?
- Yahoo! Finance: The Average Retirement Age in Every State
- Help and Wellness: Is It Better to Retire or Resign?
- CNBC: If You Left or Lost Your Job, Here Is What You Can Do With Your 401(K)
- SSA: Retirement Benefits
- SSA: Social Security Credits
- SSA: Your Retirement Benefit: How It’s Figured
- NASI: What is the Social Security Retirement Age?
- NARPP: What happens if I quit my job?
- Forbes: How To Retire Early With The Rule Of 55
- Wiserinvestor: What is the Rule of 72t and 55?
- Forbes: Guide To Rule 72(t) And Substantially Equal Periodic Payments (SEPPs)
I have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.