It’s important to save money for retirement as early as possible. However, there are times when a person has no other choice but to retire early and make early withdrawals before the recommended retirement age. If so, retirees need to learn how to avoid penalties when retiring early.
The 10% tax penalty
The IRS defines early retirement as any period before age 59.5. Withdrawing money from an IRA account before reaching that age will result in a 10% penalty. This fee is added to the withdrawal’s normal federal and state income taxes.
Reductions in costs of benefits
Early retirement reduces the costs of benefits by as much as 5/9 of one percent for one to 36 months before the average retirement age, which varies from 62 to 67 years. After 36 months, the benefits are reduced 5/12 of a percent. According to the Social Security Administration, retiring by the age of 62 reduces benefits as much as 30%.
In addition, SSA recipients are rewarded for retiring later. They receive delayed retirement credit for retiring after the normal retirement age but not after age 69.
Reinvestment requirement
Withdrawing retirement funds without a penalty is possible on a conditional basis. One requirement is to reinvest the funds in a rollover account within 60 days. A tax-free rollover is allowed only once in a one-year period.
Restricted conditions for withdrawals
There are no penalties when making withdrawals from a traditional IRA or qualified retirement plan. However, the policyholder must meet certain conditions. Individuals do not receive penalties if they withdraw funds due to a total and permanent disability. In addition, they are not penalized if their medical expenses exceed 10% of their adjusted gross incomes. There are numerous other situations when making distributions is not attached to fees.
A Roth IRA account holder can make penalty-free withdrawals up to the original contribution. A penalty is charged if the total withdrawal exceeds the total contribution.
Considering if and when to retire early
Early retirement is the opportunity to live on one’s own and pay for expenses without having to work. This is defined as leaving the workforce between the ages of 55 and 66. Before changing one’s retirement plans, reviewing the list of fees and penalties required is necessary.
“Some information on this website was written by BrandYourself, a non-affiliate of Cetera Advisors LLC” Megent Financial – Ron Whittingham, Investment Executive & Eric Burton, Investment Executive.”