Accessing Qualified Retirement Funds
Prior to Age 59 1/2

Accessing Qualified Retirement Funds
Prior to Age 59 1/2

Although it may not be recommended based on your individual situation, there are ways to access your qualified retirement funds before you reach age 59 1/2. Below are some of the situations that my clients most often ask about:

  • Rule of 72(t) Substantially Equal Periodic Payments
  • Rule of 55
  • Net Unrealized Appreciation (NUA) at age 55
  • Hardship withdrawals

IRS Rule 72(t) is the most stringent option and is often not recommended unless yours is the worst-case scenario and you have no other options. Internal Revenue Code section 72(t) allows penalty-free access to assets in IRAs and employer-sponsored retirement plans under certain conditions, such as account holder death or disability, first-time home purchases, and taking substantially equal periodic payments (SEPP). If you don’t stick to the plan, you could trigger the 10% penalty you have been trying to avoid.

Rule of 55 is also a possibility if you leave your employer during or after the year you turn age 55. Under the rule, the IRS permits you to withdraw money from your current 401(k) or 403(b) plan before age 59½ without paying a 10% penalty on the amount withdrawn if both of the following are true: (1) Withdrawals occur in the year you turn 55 or later, and (2) you have left your employer. These withdrawals must come from the employer sponsored plan and cannot be done from an IRA.

An NUA transaction during the year you turn age 55 or later is considered a rule of 55 withdrawal and there is no added 10% tax on the cost basis of the company stock in your 401k plan for this transaction. The strategy involves transferring company stock within your plan in-kind to a non-qualified account. By utilizing this strategy, you can liquidate the employer stock funds in your non-qualified account without incurring a 10% penalty since the proceeds are no longer qualified. 

Hardship withdrawals should be used for emergencies only but can be done if absolutely needed. Some examples of reasons for a hardship withdrawal are medical expenses, funeral expenses and educational expenses. The employer sponsored plan document governs whether their employer sponsored plan will allow for hardship withdrawals.

All these options need to be thoroughly understood before employing them. If you have questions or would like to talk about your specific situation, contact me to schedule a chat. 

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This material is for general information purposes only and should not be considered a recommendation to buy or sell any security, or of a specific investment strategy. Please consult a financial advisor regarding your specific situation prior to implementing an investment plan.

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