Avoiding Retirement Plan Early Withdrawal Penalties

July 23, 2010

To ensure that we all have enough to live on during our golden years, the IRS will penalize you for withdrawing money early from your retirement accounts – up to 10% in most cases – above and beyond the taxes you’ll pay on the money you have withdrawn. Think of it as the government’s way of enticing you to save. Sometimes we need that money sooner than later and penalty or not, we’re forced to dip into our retirement funds. Is there any way around all those extra fees?

Substantially Equal Periodic Payments

One option is equal periodic payments from your retirement account or IRA, using the “substantially equal periodic payments” rule (SEPP). This little known rule allows you to withdraw money in equal and regular payments, at least once a year for the remainder of your life and/or your life and the life of your beneficiary.

To satisfy the criteria for this rule:

  • You must continue receiving the payments for at least five years or until you reach age 59 ½, whichever is longer.
  • In addition, if the payments are from a qualified retirement account other than an IRA, you can only take advantage of this exception after you’ve terminated your employment from the related employer.

Withdraw from a Non-IRA Retirement Plan

You can also avoid the penalty if you withdraw from a qualified retirement plan (other than your IRA) as long as you are at least 55 and are no longer working for the respective employer. So, if you quit your job after you turn 55, you can freely withdraw funds from your retirement plan without worrying about extra penalties.

Stock Ownership Plan

In addition, many companies provide an employee stock ownership plan. Employees who are eligible to be paid stock monies can take a distribution from this plan anytime and not have to pay a penalty or early distribution tax.

Qualified Domestic Relations Order

Also remember that if you need to use your retirement account to pay child support or alimony, you will not be penalized for withdrawals for these purposes. You can also withdraw money in order to divide your estate with your ex-spouse. To qualify, you must have a Qualified Domestic Relations Order from a court that states the money is going to an alternate person than the account holder.

High Contribution to Your Retirement Plan

If you contributed more money to your retirement account than you were eligible to deduct on your taxes, you can take that money back and not pay the early withdrawal penalty. Be sure to remove the money before you file your federal income taxes.

Reno Financial Planning Services

If you are in dire need of withdrawing from your retirement plan, speak with a financial planner to figure out the best route to avoid any penalties. Anderon, Dorn & Rader has highly-rated professionals that can help guide you.


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