You can take penalty-free distributions from your retirement plan after you reach the age of 59½. However, you still must pay regular income tax due on any withdrawals, except in the case of Roth plans. Depending on your employer, you may not be allowed to take out any funds until you retire from the company. 

Early withdrawal penalty
If you begin collecting your benefit before age 59½, you may have to pay a tax penalty in addition to regular taxes. The tax penalty equals 10% of the amount withdrawn. However, the early withdrawal penalty does not apply if you roll over funds or directly transfer them to another retirement plan, or if you meet certain exceptions to premature withdrawal rules. 

Exceptions to the early withdrawal tax 
Some retirement plans have exceptions to the rules regarding the early withdrawal penalty. Check to see whether you meet any of the allowable exceptions to the early withdrawal tax, including: 

  • Dividends from employee stock ownership plans (ESOPs). These are never subject to the early withdrawal tax, regardless of your age. 
  • Substantially equal payments. You receive equal payments from the plan over your expected lifetime or the expected lifetime of you and your spouse. 
  • Medical expenses. Certain medical expenses are exempt from the early withdrawal tax if they exceed 10% of your adjusted gross income (7.5% if you or your spouse is 65 or over). 
  • Education expenses. These include tuition and other specific higher education expenses for you, your spouse, children, or grandchildren. 
  • First-time home purchase. The home can be purchased by you, your spouse, or certain other family members. 
  • Plan payments from a former employer. This exception only applies if you are at least age 55 (50 for qualified public safety employees). 
  • Alimony or child support payments. To qualify, these payments must be the result of a legal agreement rather than a private concord. 
  • Payments from a qualified annuity contract. For instance, you may receive payments from an annuity purchased by your former employer. 

If you are not in one of these categories and take early withdrawals from your retirement plan, you are subject to premature distribution penalties and ordinary income tax on the amount taken. 

You can take out any amount from your retirement plan without facing an early withdrawal penalty once you have reached the age of 59½, but you must begin withdrawing minimum annual amounts from your plan once you reach the age of 70½. 

If you fail to take out the required minimums 
If you fail to take out the required minimums, you may face a 50% excess accumulation tax. The Internal Revenue Service imposes the tax on any part of the annual minimum distribution that you fail to take. 

If you are still working when you reach age 70½, you can delay beginning your required minimum distributions until you retire—with two exceptions: If you own at least 5% of the company or if your plan is an IRA, in which case you must begin making regular distributions even if you are still working. 

When is your required beginning date? 
Your required beginning date is the deadline to begin taking distributions from your plan. If your plan is an employer plan, you have two possibilities: by April 1 of the year following the later of either: 

  • The year you reach 70½, or 
  • The year you retire 

For example, if you retire at age 68 and reach 70½ any time during the year 2014, your required beginning date will be April 1, 2015. Beginning the second year after you turn 70½, (or after your beginning date, if it's later), you must take your required distribution during the calendar year—in other words, from January 1 through December 31. You may not wait until April 1 of the following year to take the distribution. 

Special rules 
There also are a few other special rules. For example, people participating in a government or church plan may be able to delay their required beginning date. If you have specific questions in this area, we recommend you consult a plan or tax advisor. 

Consider timing 
You should carefully consider the timing of your first year's payments in light of possible tax consequences down the road. What does this mean? Consider the following example. Eleanor turned 70½ in 2014 and delayed taking her first required distribution until March 2015. That same year, her second year after turning 70½, she had to take another required distribution before December 31. The result? Taking two distributions in the same year pushed Eleanor into a higher income tax bracket. 

You may want to review this complex topic periodically as you either approach retirement or move beyond that milestone. 

Maybe you have dutifully saved for a number of years, putting aside funds into one or more retirement plans. Maybe you've even saved a little to meet your long-term financial goals. While saving money is undoubtedly the most important step in retirement planning, proper tax planning is also an important consideration. 

Tax deferral 
One option is to defer taxes on money you contribute to your retirement plans. You can make a pre-tax contribution to your plan and deduct the contribution from your taxable income on your tax return. Then, when you are older and working less or not at all, you can withdraw regular amounts from your plan and pay tax on the income at a lower rate. 

The advantage of after-tax contributions 
Another option is to contribute after-tax money to your retirement plan, which results in a basis in the account. This basis cannot be taxed again when you withdraw it from your plan. To take advantage of tax rules, you should make as many tax-deductible contributions as possible before making any nondeductible contributions of after-tax income. 

Timing is a crucial tax issue. The same retirement plans that can help you accrue your nest egg during your primary working years are also designed to encourage you to use that nest egg during your retirement years. The existing tax code is designed to discourage you from taking out your money before retirement while encouraging you to save your money to pass on to your heirs. If you take money out of your plan before retirement, or fail to take money out of your plan after you have reached your required retirement age, you will face certain tax penalties. 

Welcome, retirement! When it finally arrives, what choices do you have in how you receive distributions from your retirement plans? 

If you are 59½ but have not yet reached your required beginning date, you can take distributions of any amount whenever you like. But once you reach 70½ and your required beginning date (for most plans), you must decide how you would like to take out the money you worked so hard and long to save. 

Two distribution methods
Depending on your retirement plan, you may be eligible to collect your benefit in one of two ways: as a one-time, lump-sum payment of the entire amount in your plan or as a series of payments to meet the annual required minimum distribution. 

Some employer retirement plans—for example, defined benefit plans—build the minimum distribution requirement into their strategy. They offer annuities from which you receive monthly or other regular payments that meet your minimum distribution requirement. The annuity is a contract usually issued by a life insurance company that provides payments throughout your lifetime or the joint lifetime of you and your beneficiary (often your spouse). Another type of annuity provides payments for a fixed period called a "term certain." 

Computing payments in other ways 
If you have a different type of retirement plan, such as an individual retirement account (IRA), and you want to take periodic payments, you can compute them yourself using available IRS tables or consult with your financial advisor. You can take your required minimum distribution as one annualized payment, or receive payments monthly, quarterly, or at other intervals. 

The distribution plan you choose will have an impact on your retirement income, the taxes you pay, and even your estate planning, so it is important to explore and understand your options thoroughly. 

An annuity is a contract with an insurance company that takes the funds you have built up for retirement and makes payments to you based on a distribution method of your choice. 
There are four annuity distribution methods: 

  1. A single life annuity makes payments to you for the remainder of your lifetime. 
  2. A joint life annuity makes payments to you and your beneficiary for the remainder of your lifetime or the lifetime of your beneficiary—whichever is longer. 
  3. A term certain annuity makes payments for a specific number of years. 
  4. A life annuity with term certain makes payments to you for the remainder of your lifetime; if you die before a specific term such as ten years, payments continue to your heirs until the end of the term. 

To determine your required annual minimum distribution, you may simply divide your retirement account balance by a single or joint life expectancy factor. You can use a life expectancy table such as those found in IRS Publication 590. The following is a small segment of an IRS life expectancy table: 

Recalculating your required distribution annually 
You may choose to recalculate your required minimum distribution annually. If you recalculate, each year's required minimum distribution will be based on your life expectancy that year. If you choose not to recalculate this figure annually, you simply subtract one from your life expectancy every year following the first year you begin receiving distributions. Recalculation generally lowers your payments because, when you live another year, your life expectancy increases. 

Using amortization 
You also may determine your required minimum distribution through amortization, which is another way to liquidate your assets through periodic payments containing both interest and principal. This is the method you may have used to pay off a home mortgage loan. Amortization involves choosing a reasonable interest rate—often in the 5–10% range—and prorating the account balance across a fixed period using the rate and life expectancy tables. You can do the computation using the financial calculator built into many spreadsheet programs or available at various financial websites. 

The distribution plan you choose can also affect your estate planning and the taxes your heirs will pay. Be sure you understand your options before you sign your annuity contract.