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Money Management: Want to retire early? Here are your options for early distributions from your 401(k).

Byline: Daily Record Staff

According to the U.S. Census Bureau, the average retirement age in the United States is about age 63. The age the IRS allows you to withdrawal money penalty-free from your retirement accounts is age 59. But what if you want to retire before then? What if your company is offering you an early buyout package? What are your options to take a distribution from your 401(k) without being subjected to the IRS 10% early distribution penalty?

You have two options:

Leaving your job on or after age 55 (the "rule of 55"), or

Substantially equal periodic payments (the "rule 72t").

Here is how the website describes each rule:

Leaving your job on or after age 55

For an employee to take advantage of the "rule of 55" there are three key points early retirees must know:

You must separate from your company in or after the year in which you reach age 55 (or age 50 for qualified public safety employees). Please note that you cannot separate before that year and go back when you turn 55 and make a penalty-free distribution.

You are only allowed to take a distribution from the company you are currently employed with when you turn 55. So if you still have money in a former employer's plan and assuming you weren't at least age 55 when you left that employer, you'll want to roll those assets into your current 401kbeforeyou retire from your current job so that you will have access to these funds penalty free.

The "rule of 55" only applies to 401k plans, not IRAs. If you retire and decide to roll your money into an IRA, you will have to wait until you are 59 before you can take a penalty free distribution.

Substantially equal periodic payments

Substantially equal periodic payment or Section 72(t) distribution (the "rule 72t") is available to anyone with a 401k plan, regardless of age. For an individual to make a 72(t) withdrawal, the distributions must be "substantially equal" payments based upon their life expectancy. As soon as you start taking your distributions, they must continue for a period of five years or until you reach age 59, whichever is longest. A key item to note is if you select too high of a withdrawal rate, you run the risk of possibly running out of money before the 72(t) distribution ends.

Please remember these exceptions only pertaining to individuals who are younger than 59. Keep in mind you still have to pay income tax on pre-tax monies, too. If these two options might be beneficial to you, I suggest contacting your financial advisor before you make any decisions to ensure it is the best option for your long-term plan.

David P. Angeline is an assistant vice president at Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees. Offices are located at 183 Sully's Trail, Pittsford, NY 14534 (585-586-4680).

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Publication:Daily Record (Rochester, NY)
Date:Mar 12, 2019
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