You are not permitted to begin withdrawing from a qualified retirement plan without incurring penalty from the IRS until you have reached the minimum qualified age or have officially retired from work. The IRS defines official retirement as willful termination of employment with no intent to seek a new job after the age of 55.
If you plan to retire before the minimum age of 59-1/2, you can make withdrawals from your retirement accounts only under specific conditions without paying a mandatory 10 percent penalty. Specifically, you must end your employment no earlier than the year in which you turn age 55. If you terminate your employment at 54, for example, you can only withdraw funds under regulation 72t, which limits the amount you can withdraw each year.
You will have a relatively small amount of time to assure that you can obtain your benefits once you retire. If you reached age 55, terminated your employment and intend to withdraw funds this year, you must file paperwork and make deductions by Dec. 30 to avoid penalties come April 15.
If you make withdrawals in violation of the IRS' early withdrawal age, you face a significant penalty. First, if you are withdrawing from a traditional retirement account, you will owe taxes at the time of withdrawal. The taxes you owe depend on your current tax bracket. Second, if you do not meet 87-13 requirements, you will owe a 10 percent penalty on the withdrawal. This means that to take out $10,000, you actually have to take out $11,100, not accounting for taxes.
It's important to consider the benefits you will receive if you do not take money out of your retirement account immediately upon early retirement. Namely, the contribution limits go up for individuals over age 55. This means you can deposit more funds at a significant tax advantage once you approach retirement than you can early in your savings plan. If you do not need the funds immediately, it is in your best interest to continue saving with your retirement plan until you reach age 70 1/2.
Avoid taking withdrawals too early or too late. Many individuals retiring at an early age are doing so because they have accumulated a great deal of retirement savings. Once you reach 70 1/2, you begin facing mandatory withdrawals. This is the IRS' way of assuring that you use up your benefits before you die; failing to make withdrawals results in a penalty.
- IRS: 72t Regulations
- IRS: Plan Contribution Limits
- IRS: Retirement Plan FAQs
- CPA Journal: Early Retirement
- IRS. "Roth Comparison Chart." Accessed Nov. 2, 2020.
- IRS. "Early Withdrawals From Retirement Plans." Accessed Nov. 2, 2020.
- IRS. "Retirement Topics-Exceptions to Tax on Early Distributions." Accessed Nov. 2, 2020.
- Chuck Grassley - United States Senator for Iowa. "CARES Act Retirement Provisions FAQ." Accessed Nov. 2, 2020.
- U.S. Department of the Treasury. "The CARES Act Works for All Americans." Accessed Nov. 2, 2020.
- IRS. "Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers." Accessed Nov. 2, 2020.
- IRS. "Retirement Topics-Required Minimum Distributions (RMDs)." Accessed Nov. 2, 2020.
Based in Los Angeles, California, Bethany Eanes began her career in 2006. She specializes in legal, financial, and fitness writing, with publications on DUIAttorney.com and in local papers like "The Daily Breeze." Eanes earned a Bachelor of Science in history with focuses in humanities ad writing from Washington University.