The IRS Definition of Retirement

The IRS retirement definition is the willful termination of employment with no intent to seek a new job after the age of ​55​. While that definition may seem straightforward, the IRS has many rules around retirement and especially the treatment of retirement income. Most of the IRS rules for retirement center around significant ages in regard to retirement plans. Foremost, you are not permitted to begin withdrawing from a qualified retirement plan without incurring a penalty from the IRS until you have reached the minimum qualified age or have officially retired from work.

What Are the Age Requirements?

If you plan to retire before the minimum retirement ​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​.

How Should You Manage and Access Your Retirement Funds?

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​.

Your retirement account withdrawals will be taxed as income according to your tax bracket. You should carefully look at your overall situation and expected income from all sources in retirement. This includes calculating your anticipated cost of living and looking ahead at how your retirement distributions will impact your tax bracket, Social Security payments and possibly your eligibility for certain parts of Medicare. It is also a good idea to consider the potential need for long-term care in looking out toward retirement.

What Are Considerations Before Taking Retirement Withdrawals?

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.

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. Waiting to start taking withdrawals, especially if they are not necessary, will allow the account to grow through investments and increased catch-up contributions.

Once you reach ​72​, 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 hefty penalty.