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Navigating Early Retirement Withdrawals: What You Need to Know About Taxes and Penalties

ARTICLE | January 13, 2025

Authored by Vasquez + Company


Withdrawing from tax-deferred retirement plans, such as 401(k)s and IRAs, can be tempting during times of financial need, but it comes with significant tax consequences. The article "Breaking the Nest Egg: Tread Carefully with Early Retirement Plan Withdrawals" explores the financial impact of early withdrawals and the tax penalties involved.

Key Points:

  • Early Distribution Rules: Withdrawals before age 59½ usually incur a 10% penalty, along with income tax.
  • Exceptions to the Penalty: Special circumstances such as birth or adoption, disability, or disaster recovery allow penalty-free withdrawals.
  • Substantially Equal Periodic Payments (SEPP): A method for penalty-free withdrawals based on life expectancy, but with strict rules.
  • Changing Employers: The “Rule of 55” allows penalty-free withdrawals after leaving a job post-age 55.

Understanding these rules and exceptions can help minimize the tax burden and avoid costly penalties. For more details, read the full article here.

 


Our firm provides the information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. This article is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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