Keep Your Money Invested: Early Withdrawal Options
Saving for retirement is a long-term commitment that is most effective when your money stays in your retirement account. You may, however, need to tap retirement money at some point. Here are some other distribution options if you must pull money out of your retirement plan. Your plan may not offer some of these options.
If you're under age 59½, rolling your retirement plan distribution over to an IRA may help you avoid paying the 10% early withdrawal penalty if you need money for these expenses:
Qualified higher education and certain medical expenses.
Health insurance premium payments if you've been unemployed for 12 weeks or longer.
Qualified distributions for military reservists and members of the National Guard.
This option — known as substantially equal periodic payments (SEPPs) — allows you to withdraw money from your retirement account before you reach age 59½ without paying the 10% early withdrawal penalty. You may want to consider this method of distribution if you plan to retire early.
Here's how it works:
You take a series calculated to distribute your retirement assets over your life expectancy or the joint life expectancies of you and your designated beneficiary — at least annually.
You take these payments for five years or until you reach age 59½, whichever occurs later.
You can stop the payments once you've taken them for five years and reached 59½.
You pay income taxes on the payments.
Your employer's 401(k) plan and other types of qualified plans may allow you to take a loan from your retirement savings. Note that:
Loans aren't allowed with IRAs.
You don't pay taxes or early withdrawal penalties on loans from 401(k) plans unless you default on the loan.
You pay interest on the loan.
Taking a loan can potentially reduce your retirement savings significantly because you lose the tax-deferred growth potential of the money you take out.
Financial hardship withdrawals
Your employer's 401(k) and other types of qualified plans may allow you to take a financial hardship withdrawal if your situation meets certain criteria. Financial hardship withdrawals may be made for these reasons:
A primary home purchase
Annual higher education expenses for you, your spouse, your dependents or children (even if they are no longer dependent upon you)
Prevention of foreclosure on your primary residence or eviction from your home
Severe financial hardship
Tax-deductible medical expenses that aren't reimbursed
You can have no other assets available to meet the hardship need.
Distributions generally come only from contributed elective deferrals, not earnings.
Withdrawals from an IRA may have tax consequences, but you won't have to pay an early withdrawal penalty if you're under 59½ and use the money for higher education expenses or purchase of your first home.
Taking a hardship withdrawal can potentially reduce your retirement savings significantly because you lose the tax-deferred growth potential of the money you take out.
You can't return 401(k) hardship withdrawal money to your retirement account once payment has been made.
Nonfinancial hardship 401(k) withdrawals
Your employer's 401(k) and other types of qualified plans may allow you to take a nonfinancial hardship withdrawal for these reasons:
You become totally and permanently disabled.
Your medical debts exceed 7.5% of your adjusted gross income.
A court order requires you to give money to your divorced spouse, a child or a dependent.
You are laid off, terminated, quit or retire early in the same year you turn 55 or later.
You are permanently laid off, terminated, quit or retired and have established a 72(t) payment schedule.
You pay income taxes on nonfinancial hardship withdrawals but not the 10% early withdrawal penalty.
This information is not intended as tax advice. Investors should consult a tax advisor.
Taking early withdrawals can have a significant effect on your retirement savings and tax situation. Before taking an early withdrawal, talk with your financial and tax advisors to make sure you understand all the implications.
Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisers for a prospectus/summary prospectus.
All data provided by Invesco unless otherwise noted.
Invesco Distributors, Inc. is the US distributor for Invesco Ltd.'s retail products. It is a wholly owned, indirect subsidiary of Invesco Ltd.