Taking Retirement Plan Disbursements
When you take disbursements from your retirement accounts, even when you’re not ready, keep in mind:
- Taking cash out your retirement 401(k) savings before age 59½ will almost always cost you a 10 percent penalty and income taxes on your contributions and earnings. If you are leaving an employer, roll your investments into an IRA, keep it with your former employer or move it to your new employer’s plan (if possible).
- If you take a lump-sum pension payment from your employer, invest it wisely instead of spending it.
- Employer pensions provide a steady “paycheck” for your retirement in the form of an annuity. Be sure you understand the terms of accepting early retirement incentives and lump sum payouts in lieu of the annuity.
- Avoid taking loans out of your retirement plan. It’s not as easy to replace the loan as you may think. Additionally, you give up the earnings on the loaned money. It may be better to use other savings or take out a personal loan.
- When you take disbursements, instead of spending the money, set it aside (perhaps even reinvest) to provide for care in your advanced years.
Regardless of why you need to take a disbursement, you should consult with a financial planner to fully understand your options.
Distribution of Retirement Plan Funds Before and During Retirement
Just as there are age-related rules about taking disbursements of retirement account funds, there are also guidelines for how much to take out.
- If you are over 70½ or the beneficiary of another’s retirement plan subject to required minimum distributions (RMDs), you can take more than the RMD. Keep in mind you may be paying income taxes on these amounts.
- When taking RMDs, the minimum amount must be taken at least once a year beginning the year you reach age 70½.
- Taking distributions greater than the minimum will leave fewer funds to grow the account balance.
- Roth IRAs do not require annual withdrawals at any time.
- If you withdraw all funds in an account that is tax-deferred, you will have to pay taxes all at once at a single tax rate rather than spreading tax payments over years with periodic disbursements.
- Delaying RMDs after age 70½ can subject you to excise taxes.