Early Withdrawal From a Retirement Plan

The decision to withdraw money early from a retirement plan, especially a tax-qualified plan, such as a 401k or a traditional IRA, should not be made lightly. Not only might it compromise your retirement plans, but it will likely have significant tax consequences.

Tax Penalty

Until you turn 59½, distributions from a retirement plan are classified as "early" withdrawals. They are taxed as ordinary income, plus they are subject to a 10 percent tax penalty.

Special Circumstances

You can make early withdrawals for what the IRS labels "special circumstances," such as emergency medical expenses or buying a home for the first time. Check IRS Publication 590 for a complete list of special circumstances (see Resources).

Early-Withdrawal Exception

The IRS also allows early distributions through "72t withdrawals," using Substantially Equal Periodic Payments. See Resources for a good introduction to 72t withdrawals; they can be tricky, so use caution.

Roth IRA

You can take tax-free distributions from Roth IRA contributions at any time, and you can make tax-free withdrawals on all Roth IRA funds after you reach 59½ or have held the Roth account for at least five years.

Employer Plan Withdrawals

Besides the potential 10 percent early withdrawal penalty from a tax-qualified plan, any lump-sum distribution from a retirement plan sponsored by your employer---including 401k, 403b, SEP, defined benefit and cash balance plans---is subject to a 20 percent tax withholding.

References

• IRS Publication 590
• Roth IRA 101

Resources

• IRS Publication 590
• 72t Withdrawals