Early distribution rules for retirement plans

Michelle Buria CFP, Senior Director of Choreo, explains a couple of rules you need to know if you’re thinking of taking money out of a retirement account early.

The first is the Rule of 55. Michelle explains, “You have to be age 55 or older to draw without a penalty of retirement account.”

There are a couple criteria that needs to be met: “First is that the employer plan has to allow for it. It’s not something that is automatically written in to a benefits plan. So somebody would need to read their employee benefits plans summary.

“The other thing is that money does need to be drawn from a 401k so somebody cannot roll money into an IRA and expect to take penalty free distributions. And along those same lines, a 401k has to be from your most recent employer.”

If you’re most recent employer allows, you could consolidate that money Michelle adds.

The next rule is 72t. “This could be utilized with an IRA and this is defined as when you need to take substantially equal periodic payments,” Michelle says.

“You cannot dictate the amount that you take. The amount of that distribution is designated for you. It’s based on the evaluation of the account as actuarial tables”

Michelle says you want to be closer to that age when you start in the early year before age 59, “Any distributions from retirement accounts is taxable so people need to keep that in mind. And also the saying, ‘Just because you can doesn’t mean you should.'”

Michelle recommends meeting with your financial planner to discuss whether these decisions are in your best interest.