How Do I Avoid a 10% Penalty Pre 59 1/2?
Updated: May 13, 2019
Today we're going to talk about how to avoid a 10% penalty when taking money from your retirement account, pre 59 1/2.
Option #1 - Take a loan. It is tax-free, but of course you have to pay back this loan. Personally, I don't think this is good idea. They're very expensive and you can be penalized if it's not paid back according to the terms
Option #2 - The IRS Rule #55. This rule allows an employee who is laid off, fired, or who quits a job between the ages of 55 and 59 1/2 to pull money out of his 401(k) or 403(b) plan without penalty. This applies to workers who leave their jobs anytime during or after the year of their 55th birthdays.
Option #3 - Individual K. If you leave your corporate job and become a sole proprietor you have the option of rolling your 401K into a Individual K which allows loan provisions, unlike an IRA.
Options #4 - Section 72(t) Distribution. Using this type of distribution rule, you would start by calculating your life expectancy and use that to calculate five substantially equal payments from a retirement plan for five years in a row before the age of 59 1/2. But distributions can occur at any age and they're not bound by the same age 55 threshold as the Rule of 55.
What about Annuities? Similar to the 72(t) it allows you you take equal and periodic payments until your 59.5 or 10 years, whichever comes first.
Why is this important? If you plan on retiring before you're 59 1/2 than you will want to know your options so that you can create a financial plan for retirement that may take these circumstances into consideration.