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  • Mark Fonville, CFP®

When to Withdraw 401(k) and IRA Savings for Retirement


When to Withdraw 401(k) and IRA Savings for Retirement

If you watch the news, it seems like the biggest issue facing retirees and those soon to be retired is inadequate savings.


But that’s not actually the case.


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According to research by the Blackrock Retirement Institute, most current retirees still have 80% of their retirement nest egg available two decades into retirement. That figure is constant across all income levels and is expected to continue until 2030.

The challenge for Baby Boomers isn’t accumulating savings for retirement, it’s decumulating in the most efficient way. In other words, for most people in their 50s, the most pressing concern is when to withdraw 401(k) and IRA savings in retirement.


On the surface of it, that seems like a good problem to have, but mistakes can be costly. If you don’t withdraw your 401(k) and IRA savings at the right time, you could owe penalties and unnecessary taxes. Even worse, poorly timed withdrawals could shorten the life of your nest egg or reduce the income generated by your investments, impacting your lifestyle later in retirement.

Here’s what you need to know about when to withdraw 401(k) and IRA savings for retirement and develop an effective decumulation strategy.


401(k) and IRA withdrawal basics


Most people intuitively understand that retirement savings should be left alone until you actually retire. For those who are tempted to tap those funds before retirement, the government established rules and a 10% penalty for early withdrawals.


Avoiding early withdrawal penalties


You can avoid the 10% early withdrawal penalty by waiting until age 59-½ to take IRA and 401(k) withdrawals. If you want to retire early—before 59-1/2—the “rule of 55” applies.


If you retire, quit, or are fired from your job any time during the year you turn 55, you may be able to access your retirement account without a withdrawal penalty. However, there are two points to keep in mind:


  • The penalty exception only applies to money in the 401(k) you have with your current employer. If you have money in an account with a past employer, you can’t access those funds before age 59-½. You can avoid this rule by rolling over any funds in other accounts to your current 401(k) before you retire.

  • The exception doesn’t apply to IRAs, only 401(k) accounts. If you rolled your 401(k) funds into an IRA and retire at 55, you will still owe the 10% early withdrawal penalty on IRA distributions until age 59-½.


The SEPP escape hatch


Rule 72(t) provides exceptions to the 401(k) or IRA early withdrawal penalty if you take at least five substantially equal periodic payments (SEPPs). Under rule 72(t), SEPP amounts are based on life expectancy and calculated according to IRS guidelines. The payments must take place for five years or until the account owner reaches age 59-½, whichever is longer.


SEPPs are usually considered the option of last resort since they offer the lowest overall retirement payout. Generally, if you need to take an emergency early withdrawal, it’s best to explore other IRS exceptions before pursuing SEPPs because they can have a significant impact on the lifespan of your retirement account.


401(k) and IRA withdrawals by age


An efficient decumulation strategy begins with understanding the IRS rules that apply at each stage of retirement.


Under age 55


The 10% early withdrawal penalty usually applies to any withdrawals prior to age 55. In addition, withdrawals can only be taken from 401(k) accounts with past employers. You generally aren’t allowed to take withdrawals from your current employer’s 401(k), although your employer may allow loans or hardship withdrawals.


Ages 55 to 59-½


The 10% early withdrawal penalty applies unless you meet the “rule of 55” exceptions related to early retirement or job loss listed above.


Ages 59-½ to 72