How to Withdraw Retirement Funds

Four Parts:Understanding the Age Categories for Retirement WithdrawalsWithdrawing Retirement Money EarlyPlanning Your Retirement Withdrawal AmountsMaking Required Minimum Distributions from your Retirement Funds

Your retirement account provides a nest egg for the later years of your life. As this investment continues to grow, it is important to understand how to withdraw retirement funds once the time is right and the need arises. Because there are very specific rules governing IRA distributions, some research is important so that you make your retirement withdrawal according to those rules. You need to know when you can begin taking money from your account and the best way to play your withdrawals, to maximize the tax benefits. As with any financial decisions, you should consult with an accountant or other tax professional for assistance.

Part 1
Understanding the Age Categories for Retirement Withdrawals

  1. 1
    Take early withdrawals before age 59 1/2. For most retirement accounts, you must leave the money in the account until you reach the age of at least 59 1/2 years old. If you withdraw any part of the funds before you reach age 59 1/2, the withdrawal is considered to be premature and will generally result in a tax penalty. There are some exceptions that allow early withdrawal without penalty.[1]
  2. 2
    Take optional withdrawals between ages 59 1/2 and 70 1/2. After age 59 1/2, you are allowed to withdraw funds from your retirement accounts without paying a tax penalty. However, you are not required to do so at this time. You may leave the money untouched in the account, accrue interest and continue making contributions.[2]
  3. 3
    Take mandatory withdrawals after age 70 1/2. Because retirement accounts provide special tax benefits, the IRS sets requirements on those accounts and does not allow you to leave the money in the account indefinitely. You must take required minimum distributions following age 70 1/2. Failing to take the withdrawals as required can result in significant tax penalties.[3]

Part 2
Withdrawing Retirement Money Early

  1. 1
    Qualify for an early withdrawal without a tax penalty. In general, you must wait until you are 59 1/2 years old to withdraw money from a retirement fund, without paying a tax penalty. However, there are some exceptions to this rule. These exceptions, if you qualify, will allow you to withdraw from your retirement fund without paying a tax penalty. The exceptions are:[4]
    • ”Separated from service.” This term basically means that you are no longer working, through layoff, termination, quitting or retiring. You must be at least 55 for this exception to apply.
    • Permanent disability
    • Death, with the funds being distributed to your beneficiary
    • To pay unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
    • By court order, such as payments to an ex-spouse or dependent
  2. 2
    Take a hardship withdrawal. A hardship withdrawal is permitted in limited circumstances when you can demonstrate severe financial need. You must also be able to show that you are unable to obtain the money you need from any other resource. When you make a hardship withdrawal, you will be required to pay a tax penalty of 10% of the withdrawal amount. Therefore, as an example, if you withdraw $10,000 as a hardship withdrawal, you will be required to pay $1,000 as a tax penalty. The recognized reasons for hardship withdrawals include the following:[5]
    • Qualified unreimbursed medical expenses for you or your immediate family
    • Qualified higher education expenses for you or your immediate family
    • The purchase of a primary residence
    • Payments necessary to prevent eviction from or foreclosure of your primary residence
    • Qualified repairs of damage to your primary residence
    • Funeral expenses
  3. 3
    Cash out your retirement plan when you leave your employment. When you leave your current job, you may also be able to cash out your retirement account. However, doing so will also result in a 10% tax penalty, unless you qualify under some other category for an allowed, non-tax early withdrawal.[6]
    • For example, suppose you have been with a company for a number of years, and you have built up a retirement account of $50,000. If you elect to cash out this account when you leave the company, you will be required to pay a tax penalty of $5,000.
  4. 4
    Make an early withdrawal from an IRA for a qualified reason. If you are withdrawing from an IRA, as opposed to a 401(k) or 403(b) plan, before you reach age 59 1/2, you may do so without penalty if you meet one of the qualifying requirements. The IRS identifies nine different qualifying reasons for early IRA withdrawals. If you fall within one of these nine categories, you will not be assessed an early withdrawal penalty:[7]
    • First-time home purchase (up to $10,000)
    • Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
    • Medical insurance if you are unemployed and received unemployment insurance for at least 12 weeks
    • Qualified higher education costs
    • Satisfaction of a levy by the IRS
    • Death, and the funds are distributed to your beneficiary
    • Permanent disability
    • If you are receiving distributions in the form of substantially equal periodic payments
    • Rolling over the funds to another IRA

Part 3
Planning Your Retirement Withdrawal Amounts

  1. 1
    Consolidate multiple retirement accounts. People often may accumulate multiple retirement accounts, if they have worked for several different companies over the course of their career. It can be cumbersome or inefficient to manage multiple accounts in your retirement years. To simplify the process, it is a good idea to consolidate your multiple accounts into a single IRA, and then make withdrawals from that single account.[8]
    • Some restrictions exist about the types of accounts that can be combined. You should talk with an accountant or the manager of your retirement accounts for assistance.
  2. 2
    Calculate withdrawal amounts to make your retirement money last. If you begin making retirement withdrawals at age 59 1/2, you could have an estimated life expectancy of about another 30 years. To make your money last this long, you should begin with a withdrawal of 4% of the balance of your account. From then on, adjust the amount of your withdrawal by the rate of inflation.
    • For example, suppose you wish to retire at age 59 1/2, with a total of $100,000 saved in one or more retirement accounts. This recommendation would say that you should withdraw $4,000 in the first year of your retirement.[9]
  3. 3
    Withdraw from your accounts in a “tax-efficient” order. If you have different types of retirement accounts, you should plan to withdraw from them in a particular order to maximize the tax benefits.[10]
    • Withdraw first from taxable accounts. This will decrease the balance in the account and therefore decrease the amount of tax that you will be required to pay.
    • Withdraw next from tax-deferred accounts, such as an employer’s pension plan or a traditional IRA.
    • Finally, withdraw from non-taxable accounts. Because these accounts are not taxed, you want to maximize the balances you leave in them to save the most in tax payments.

Part 4
Making Required Minimum Distributions from your Retirement Funds

  1. 1
    Begin your minimum required distribution when you reach 70 1/2. For most employee pension plans, IRAs, 401(k) and 403(b) retirement plants, you must begin taking withdrawals, known as minimum required distributions (RMDs), by April 1 of the year after you turn 70 1/2 years old. Each year thereafter, you must take the RMD by December 31.[11]
    • For example, if you were born on May 1, 1946, then you turned 70 on May 1, 2016, and 70 1/2 on November 1, 2016. You must take your first RMD by April 1, 2017. You are then required to take the RMD by December 31 of each following year.
    • Failing to make the RMD by the deadline can result in a tax penalty of up to 50% of the amount of the distribution.
  2. 2
    Find the balance of your retirement account. To calculate the RMD for a given year, you must first know the balance of the account. This is measured as of December 31 of the previous year. For example, if you are calculating your RMD for 2016, you will need to determine the balance of your retirement account on December 31, 2015.[12]
    • If you had any rollover into your retirement account from a Roth IRA after December 31, you will need to add this amount to the balance. For example, if your retirement account balance was $70,000 on Dec. 31, and you later rolled over $15,000 from a Roth IRA, then you will use the sum of $85,000 as your account balance.
  3. 3
    Find your IRS Distribution Period number. The IRS provides a worksheet for calculating your RMD based on your age. This worksheet is available at https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf. Using the table on that worksheet, you will locate your age and the corresponding Distribution Period number. The numbers decrease on a sliding scale, beginning at age 70 and going through age 115 and above.[13]
    • For example, someone making his or her first RMD at age 70 will find a Distribution Period number of 27.4. Someone calculating the RMD at age 80 will use the table to find a Distribution Period number of 18.7
  4. 4
    Calculate your RMD. To find the amount of your RMD, divide your account balance by the IRS Distribution Period number. The result of this calculation is the minimum amount that you must withdraw from your retirement account.[14]
    • For example, suppose your retirement account balance is $85,000, and you are making your first RMD at age 70. This will have a Distribution Period number of 27.4. Therefore, your RMD is $3,102.19.
    • You are allowed to withdraw more than the calculated minimum amount, if you wish.
    • If your spouse is the sole beneficiary and is more than ten years younger than you, you will use a special calculation worksheet. This worksheet is available at https://www.irs.gov/pub/irs-tege/jlls_rmd_worksheet.pdf.
  5. 5
    Report your retirement withdrawal when you file your taxes. When you take your retirement distribution, the bank or other facility holding the account will issue you a 1099-R form. You will use this form to report the withdrawal as part of your tax return.[15]

Warnings

  • Some banks may also assess their own penalties on early withdrawals from retirement accounts. Talk to the institution or fund manager to find out the specific rules regarding your account before making a retirement withdrawal.
  • The rules regarding IRA distributions are very specific and must be followed to the letter to avoid tax penalties. If you are unsure how to make your retirement withdrawal, talk to a tax accountant about the best way to complete and report your transaction.

Article Info

Categories: Retirement