How Much Will It Hurt to Tap Retirement Savings?

If you are looking to pull cash from your 401(k) plan or traditional IRA without getting hit with a penalty, the IRS will allow you to do it.

This is a move of last resort. You’ll need to do all the research to be sure this will not do more damage to your retirement savings than absolutely necessary. You are allowed to take a series of equal payments from your IRA or a 401(k) account, without being subject to a 10% penalty—but only under certain circumstances, advises CNBC in the article “How to tap your retirement savings without getting hit with a stiff penaltybut only if you absolutely have to.”

Taking an early withdrawal from a qualified retirement account before age 59½, results in a hefty 10% penalty in most situations. You must also add the taxes that you have to pay on the distribution itself. Yes, it’s your money but you agreed to keep it in the account under certain distribution limitations and the rules are not very flexible.

Except, when they are.

There are very specific sets of circumstances, when the IRS will let you take the early withdrawal and not have to pay a 10% penalty. One of these is receiving a series of equal payments from your IRA or 401(k), known among tax advisors as a “72(t) distribution.”

However, be careful: just because you can do this, doesn’t mean you should do it.

There are rules (of course!). You have to commit to take at least one payment a year for five years or until you reach 59½, whichever is the longer period of time. After that period is over, you can change your payment amount or stop the withdrawals.

If your money is in a 401(k), the rules are a little different: you must separate from service during or after the year you turn 55, in order to start taking payments.

However, if you make changes to your payments or if you go into the account for an additional withdrawal, you’ll get slammed with that 10% penalty retroactively for payments received plus interest.

What if you roll a 401(k) into the IRA after these series of payments? Don’t do it. That is a big mistake that could cost you plenty.

The numerous ways you can make a mistake and end up with a costly bill in penalties and taxes, makes this a no-no for practically every CPA.

Your alternatives: have an emergency fund or even take out a home equity line of credit. A 401(k) loan would be even better, as long as you know that you can pay it back.

Depending on the circumstances of your emergency, there may be some instances, where the IRS may waive your 10% penalty. But look, this is not a do-it-yourself project. Make sure you have excellent advisors on your team, if you need to take this step.

Reference: Financial Planning (Sep. 10, 2018) “How to tap your retirement savings without getting hit with a stiff penaltybut only if you absolutely have to”

Hear From Our Clients

I heard Cindy’s presentation at a Senior Luncheon at my church, and was very impressed. She helped my daughter and me understand many aspects of elder law. Josh has also been very helpful in my planning to enter an independent living situation . I have told many friends about them.

- Charlotte

The very best elder law attorney and staff anyone could ever ask for! I have referred a number of clients to Cindy and she never disappoints. She is kind, caring, and extremely thorough in making sure everything is completed as it should be. I highly recommend Cindy for anyone needing lawyer services; she truly goes above and beyond for every client she helps and has had a huge impact in so many peoples’ lives. Thank you, Cindy and staff, for everything that you do- I’m so glad to know you!

- Kerri

Cindy and the Nelson Elder Care Law team are trustworthy and helpful. They are the experts in elder care law. At Leaf Cremation, we entrust our families to the care of the Nelson team when their services are needed.

- Pierce

Josh Nelson, and his staff, have been amazingly helpful to our family. The ins and outs of nursing homes, the rules and regulations that govern Medicare and Medicaid are daunting and the folks at Nelson Elder Care Law have been informative, responsive, and above all, empathetic. I cannot emphasize enough how their service has taken a weight off of our shoulders especially during a world pandemic that has targeted nursing homes across our country. I highly recommend retaining Josh and his firm!

- Marcia

I had a simple legal question to them that I needed answered and they very helpful in giving me the information I needed. I highly recommend them and will reach out to them if I need more advice or assistance. Thank you for taking your time to just answer a couple of questions I had!

- Ben