When Can I Withdraw Money from My Tax-Deferred Investments

September 22nd, 2016

If you have made tax-deferred investments, you probably know that you can’t withdraw money from that account before the age of 59½. Doing so will trigger a 10% federal income tax penalty, where all the distributions are subjected to ordinary income tax. However, there are certain situations which allow you to avoid this tax penalty and make early withdrawals from the retirement account.

The regulations for both the IRA and employer-sponsored retirement are almost the same but they do have different exceptions.

IRA Exceptions

1. The death of the IRA owner

If the owner of the IRA has passed away, then their beneficiaries can start taking the distributions from the account, who will be subjected to annual required minimum distribution.

2. Disability

You are eligible to withdraw distributions from your retirement account if you have encountered a disability or are disabled.

3. Unreimbursed medical expenses

If there are any unreimbursed medical expenses that exceed 10% of the adjusted gross income in a calendar year, you can with withdraw the amount you paid for those expenses.

4. Medical insurance

You can withdraw money to pay for health insurance if you lost your job or are receiving unemployment benefits.

5. Part of a Substantially Equal Periodic Payment (SEPP) plan

If you receive a series of substantially equal payments over your life expectancy, you can take payments over a period of five years or until you reach age 59½, whichever is longer. You will be levied a 10% tax penalty if there is any change in the payment schedule after you begin distributions.

6. Qualified higher-education expenses

If you or your dependents choose to study further, you can take the distributions.

7. First home purchase

There is a lifetime limit of $10,000 on the withdrawal if you take the money to purchase your first home.

Employer-Sponsored Plan Exceptions

1. The death of the plan owner

Your beneficiaries can take distributions from your account after your death. However, they will be subjected to annual required minimum distributions.

2. Disability

You can start withdrawing the distributions, under some conditions, if you are disabled.

3. Part of a SEPP program

You can take payments over a period of five years or until you reach age 59½, whichever is longer if you have received a series of substantially equal payments over your life expectancy, or the combined life expectancies of you and your beneficiary.

4. Separation of service from your employer

If you have made payments annually over your life expectancy or the joint life expectancies of you and your beneficiary, you can withdraw money after separating from your employer.

5. Attainment of age 55

If you separate from your employer during or after the calendar year when you turn 55, the payment will be made to you.

6. Qualified Domestic Relations Order (QDRO)

The payment is made to an alternate payee under a QDRO.

7. Medical care

If you need to withdraw money as a medical expense deduction, then you can withdraw the allowable amount.

8. To reduce excess contributions

If there is a scenario where you or your employer made contributions that are over the allowable amount, you can make withdrawals from the account.

9. To reduce excess elective deferrals

You can withdraw if you have elected to defer an amount over the allowable limit.

Keep all the rules in mind and examine them carefully if you plan to withdraw funds from a tax-deferred account. Remember all the possibilities in mind before you invest your money. Consult with the concerned team if you need any guidance on the same.

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