• Mark

401(k) 403(b) Early Distributions for Early Retirement (FIRE)

FIRE - Financial Independence, Retire Early

Since my early twenties, I planned to retire in my 50's.  My original goal was 50, but time, children, and healthcare have shifted that goal to 55.  At this point, I'm 8 years away from that goal.

One question I routinely have is how to access my money before the traditional 59 1/2 that employers stress to new enrollees.

While researching this question, I came across the following information from the IRS website (reference below).    

No Additional 10% Tax
Distributions that aren't taxable, such as distributions that you roll over to another qualified retirement plan, aren't subject to this additional 10% tax. For more information on rollovers, refer to Topic No. 413and visit Do I Need to Report the Transfer or Rollover of an IRA or Retirement Plan on My Tax Return?
There are certain exceptions to this additional 10% tax. The following six exceptions apply to distributions from any qualified retirement plan:
  • Distributions made to your beneficiary or estate on or after your death.

  • Distributions made because you're totally and permanently disabled.

  • Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.

  • Distributions to the extent you have deductible medical expenses that exceed 7.5% of your adjusted gross income whether or not you itemize your deductions for the year. For more information on medical expenses, refer to Topic No. 502.

  • Distributions made due to an IRS levy of the plan under section 6331.

  • Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:
  • Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental benefit plan, as defined in section 414(d) if you were a qualified public safety employee (federal state or local government) who separated from service in or after the year you reached age 50

  • Distributions made to an alternate payee under a qualified domestic relations order, and

  • Distributions of dividends from employee stock ownership plans.

Although there are many exceptions to the 10% penalty, there is one that seems to fit my goals specifically:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55.  

It's important to note that these distributions should only be obtained from the employer that you are leaving.  Inc states:

"This exception applies only to distributions you receive after you have separated from service, or terminated your employment with the company that sponsors the plan."

This strategy may help those who are close to retirement, but have not yet reached 59 1/2 years of age.  Additional exceptions above will be covered in a future article.


https://www.irs.gov/taxtopics/tc558 referenced on 8/19/2018.


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