Early Retirement Plan Withdrawal Calculator

How much will an early retirement cost you?

Saving for retirement using an IRA or a qualified plan (401k etc) can offer investors many tax benefits. But as most plan holders already know, taking early payments from these accounts can be extremely costly. You’ll typically be on the hook for your state, local, and federal taxes, plus a 10% penalty tax if you want your earnings before the age of 59.5. If you’re thinking about making an early withdrawal, use the calculator on this page to see the money you’ll be left with. You may want to re-consider. If you continue reading, you can find out various ways take payments from your retirement savings without triggering the penalty.

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retirement plan withdrawal
Retirement plan basics
Saving for retirement can be simple when you participate in a qualified program or open up an individual retirement account (IRA). Typically, you can set up automatic transfers into your savings through your employer or custodian. You'll also benefit by receiving yearly investment returns and certain tax breaks on your deposits. Over time, your earnings will generate their own earnings so you can save up more money without taxes eroding your growth.
Qualified plans, such as 401k and 403b, differ slightly from an IRA concerning their features, requirements, and tax treatments. One similarity between the savings programs is the early withdrawal penalty. If an individual takes money from the account before they turn 59.5, it will trigger a 10% penalty on the distribution.
Taking money out of your 401k or IRA can be tempting, especially if you’re short on some cash. It can seem like a good solution to pay down your credit after an emergency or to keep up cash flow between jobs. Though it doesn’t appear to be a big deal, especially if you’ve been good about saving, there can be far-reaching consequences.
Early withdrawal consequences
The main appeal of tax-favored accounts is their tax-deferred (or tax-exempt for ROTH) compounding, which gives your savings greater potential to grow. Cashing out when you change jobs or need extra money inhibits that valuable growth. Those newer to investing could compromise the foundation of their retirement by taking early payments.
Older 401k investors that choose to cash out could setback their retirement considerably. Their overall portfolio returns will likely suffer, and it can be difficult (sometimes impossible) to catch up. As the older investor nears retirement, there is less time to recover from a setback in his or her savings.
For earners at the peak of their career, the result can be up to 50% loss of their earnings. That means an investor would theoretically have to draw double the amount they were hoping to get, from their retirement savings. Even if said investor is not currently in the top tax bracket, a substantial withdrawal could push him or her into higher levels of taxation. Thus, creating a more significant tax bill with the IRS.
Alternatives to cashing out
If you are experiencing financial hardship and need money, there are other ways to tap into your savings plan or IRA. Though dipping into your savings early is seldom recommended, there are a few ways to avoid the early withdrawal fee. In the next two sections, we’ll review how to skip the penalty tax based on the type of account you hol d.
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For qualified plan holders (401k, 403b, etc)
When you absolutely need money for a short-term crunch, you could consider a loan from your 401k. Immediately, there are administration and maintenance fees to tap into your money. Your investments will also have to be liquidated for the duration of your loan. You could miss out on some earnings during that time, but you’ll at least dodge the penalty tax.
Here’s how it works: Instead of paying interest to a creditor, you’ll pay interest to yourself. The interest is structured to match the average performance of your investments, so there is a neutral effect on your savings. You can avoid paying taxes on the loan if you stay within the terms of your contract. Usually, the loan comes due if you leave your job. But in most cases, you’ll have a five-year schedule to pay back the loan.
There are some other exceptions for investors that need their savings but don’t want to take out a 401k loan. Each plan administrator can have different restrictions, so you may have to refer to your plan documents. Please see the table below.
Exempt from penalty tax Guidelines
Age 55 exception You leave your employer or lose your job at the age of 55. In this case, you can take payments without penalty.
Age 50 exception You have left employment in public safety (police, paramedic, fire fighter, etc) at the age of 50. In this event, you can begin taking penalty-free payments.
Disability exception If you you have become totally and permanently disabled, you can use your savings without the penalty tax.
72(t) distributions You can use this tax code to withdraw a series of equal payments for five years or until you turn 59.5 years old – whichever comes later.
High unreimbursed medical expenses If you, your spouse, or your dependant face medical costs greater than 7.5% of your adjusted gross income (AGI), you may be able to withdraw some money penalty-free. Usually, the reimbursement is your expenses minus 10% of your AGI.
Excess contribution correction If you deposited too much into your plan, the excess could usually be returned without penalty.
Auto-enrolment If you were automatically enrolled in a 401k, but don’t wish to participate, you may be able to take permissive distributions. Typically, there is a time limit to claim this exception.
Divorce If your assets need to be divided with your former spouse, the transfer is penalty-free when part of a divorce decree.
IRS levy When the IRS collects unpaid taxes from your account, the withdrawals are usually penalty-free.
ROTH conversions When you convert your funds from traditional to ROTH deposits, you’ll only pay the taxes on the conversion.
Before taking money from your qualified account, it's wise to consult with a financial advisor. At times, the rules for getting an exemption can be tricky to follow. In this type of situation, it's important to know all the details and follow them carefully.
For IRA holders
If you find yourself needing money to remedy a temporary situation, an IRA could give you penalty-free withdrawals under certain circumstances. Unlike a qualified plan, you can’t take a personal loan from your IRA. Instead, IRAs have some extra allowances. Please see the table below:
Exempt from penalty tax Guidelines
60-day rollover If you want to transfer your retirement assets from an IRA to another qualified account, you have 60 days to complete the transfer. This can give you brief access to your money.
Disability exception If you become totally and permanently disabled, you can use your savings without the penalty tax.
Non-reimbursed medical expenses If you, your spouse, or your dependant face medical expenses greater than 7.5% of your adjusted gross income (AGI), you may be able to withdraw some money penalty-free. Usually, the reimbursement is your expenses minus 10% of your AGI.
First-time homebuyers When buying your first home, you can use up to $10,000 from your savings without penalty.
Higher education expenses If you, your spouse, your child or grandchild, go to a qualified educational institution, you could use your IRA to cover the costs of schooling. The reimbursement is dollar for dollar towards books, tuition, and some other eligible expenses.
IRS levy When the IRS collects unpaid taxes from your account, the withdrawals are usually penalty-free.
Medical Insurance premiums If you lost your job and have to pay for your own medical insurance premiums, you can use money from your IRA. As long as you have been unemployed for 12 weeks, the penalty tax won’t apply.
Before taking money from your IRA, it can be helpful to consult with a financial advisor - as it can be tricky to follow the rules on exemptions. There are many subtle details, and it pays to know all of them.