Many people look forward to retirement, anticipating a time of freedom and relaxation. Most diligent workers sacrificed and saved during their entire careers to ensure their retirement is adequately funded. Despite many years of saving and planning, retirement comes with surprises for those who find themselves unprepared and unaware of Internal Revenue Service (IRS) guidelines. The facts may lead some retirees to rethink their action plans due to unexpected consequences.
Early Withdrawal Penalty
Other than spending too much too soon in retirement, there are other concerns and penalties for retiring early. The most common tax penalty is the ten percent early withdrawal penalty. Young retirees who want to take their first withdrawal before they reach age 59 years and six months are subject to a penalty of ten percent of the distribution amount. This ten percent is a penalty above and beyond the tax liability for the distribution itself.
Taxable distributions, and tax-free distributions under a qualified Roth contribution plan, may be exempt from additional penalties if specific criteria are met. Retirement contributions into an employer-sponsored plan or an individual retirement account are covered by the Safe Harbor guidelines that govern qualified withdrawals. A few common conditions of Safe Harbor plans include:
- Purchase of a primary residence
- Avoid eviction from or foreclosure of primary residence
- Qualified tuition expenses for contributor or dependent
- Qualified medical expenses for contributor or dependent
One important note is that these exceptions allow for withdrawals from a retirement account under special circumstances. However, the overall withdrawal is still considered a taxable event, and the early withdrawal penalty could still apply.
Retirement Without Penalties
Despite aggressive IRS guidelines and tax implications of retirement withdrawals, hope exists for those who wish to cut their career short and move forward with early retirement. There are easy ways to plan for early retirement without risking IRS penalties, additional taxes, and unnecessary fees. Personal savings accounts may not yield exceptionally high interest rates, but they are not subject to special tax withholding or withdrawal penalties.
Although they are typically more volatile than other investment options, brokerage accounts and stock market investment programs offer a high return potential. Money market accounts, annuities, and high yield savings are available for those with higher net worth.