It takes a lot of years and hard work to arrive at retirement. Hopefully, you've been able to set aside enough funds in a company retirement plan to enable you to spend your golden years in relative comfort and security.

Exceptions to the Early Withdrawal Penalty

    The tax law imposes an additional 10 percent tax on certain distributions from retirement plans to discourage participants from using the money before retirement.
    Early distributions are those received from a qualified retirement plan or deferred annuity contract before reaching age 59 1/2. The term "qualified retirement plan" includes a 401(k) or 403(b) plan, traditional IRA, and other plans.
Note: If you take an early distribution from a SIMPLE IRA plan within the first 2 years of participation, the additional tax is 25 percent.
    There are exceptions to this penalty. The following exceptions apply to distributions from any qualified retirement plan:
    1. Made to your beneficiary or estate after your death.
Made because you are permanently disabled.
Made as part of a series of substantially equal periodic payments over the life expectancy of the owner (or life expectancies of the owner and the beneficiary). If these are from a qualified plan other than an IRA, you must separate from service with the employer before the payments begin.
That are equal to, or less than, your deductible medical expenses. In other words, the amount of your medical expenses that is more than 7.5 percent of your adjusted gross income.
Made due to an IRS levy.
Made to qualified reservists who were generally called to active duty after September 11, 2001 and before December 31, 2007.
The following exceptions apply only to distributions from a qualified retirement plan other than an IRA:
    1. Made to you after separating from service with your employer, if the separation occurred in or after the year you reached age 55 (After August 17, 2006, does not apply to distributions from qualified governmental plans if you were a public safety employee who separated from service after you reached age 50),
Made in a divorce under a qualified domestic relations order.
Comprised of dividends from employee stock ownership plans.
The following exceptions apply only to distributions from IRAs:
    1. Equal to or less than your qualified higher education expenses.
    2. Made to pay for a first-time home purchase.
Made to pay health insurance premiums if you're unemployed.

Let's say you have a 401(k) plan at work and you have deferred a portion of your salary each year to the account. Even better, your deferrals might have been "matched" by company contributions up to a stated percentage of compensation. Plus, you are entitled to receive all the earnings you've accumulated over the years.   

 You still have some work ahead of you. Specifically, you must make some tough decisions concerning distributions of funds from the retirement plan. This is also true if you are switching jobs.

Let's take a brief look at the four main options:

1. Know when to hold 'em.  When the retirement plan permits, you can simply leave the money where it is. In other words, although you're no longer an employee for the company, you continue to maintain the same account. Of course, you can't contribute to your account anymore, but the funds will continue to grow tax-deferred. This might be the route to take if you don't want to change your investments.    

 On the downside, you may have some concerns about administering your account when you're no longer an employee at the company. In many cases, retirees and departing employees choose to pull out the funds.

 2. Know when to fold 'em.  If you need the cash immediately, you can choose to receive a lump-sum distribution from the plan. But be aware that the tax price is steep: The entire distribution is taxed at ordinary income tax rates, which can be as high as 39.6 percent. And, if you're under age 59½, you generally are required to pay a 10 percent early withdrawal tax penalty on top of the regular income tax you owe. (There are several exceptions to the 10 percent penalty as described in the right-hand box.)

 Years ago, lump-sum distributions were eligible for special "income averaging" provisions, but now relief is limited to certain individuals born before 1936. (These optional methods can be elected only once after 1986 for any eligible plan participant.)

 3. Play "roll over" with the funds. The tax law permits you to roll over funds to a traditional IRA or another qualified plan on a tax-free basis as long as the rollover is completed within 60 days. (The IRS may waive the 60 day requirement in certain situations, such as a casualty, disaster, or other event beyond your reasonable control.)

 Once you roll over the funds, they can continue to accumulate without current tax until withdrawals are required (generally, after reaching age 70 1/2). If you roll over to a Roth IRA, you'll have to pay the tax due for a conversion.

 To avoid income tax withholding on the rollover, arrange a trustee-to-trustee transfer of the funds. This way, you never actually touch the money yourself.

 4. Spread out the wealth.  If you don't need all the cash right away, but you want to begin withdrawals to pay for living expenses, you can arrange to receive periodic payments from your account. The distributions are taxed at ordinary income rates, but the tax liability is spread over the years that payments are received. Since you'll probably be in a lower tax bracket in retirement, your overall tax bill is likely to be reduced.

 The distributions are generally based on your life expectancies or the joint life expectancies of you and a beneficiary.

 What route should you take? It depends on your personal circumstances. The above rules are general in nature. There are many exceptions that may apply. Contact your trusted financial adviser and discuss the options.

No matter which route you take, federal law sets a mandatory date by which you must start receiving your retirement benefits, even if you want to wait longer. This mandatory start date generally is set to begin on April 1 following the calendar year in which you turn 70 1/2 or, if later, when you retire. However, your company plan may require you to begin receiving distributions even if you have not retired by age 70 1/2.

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