How To Withdraw Money From Your Retirement Savings

When you retire, it’s important to know how to access your retirement fund. Withdrawing from your retirement accounts is often challenging when you want to ensure you’ll have a steady income for years. Your retirement fund can also be subject to federal taxes, state taxes, and other expenses.

This guide describes the rules for withdrawing or receiving benefits from common types of retirement accounts. You should consider issues like taxes and your investment strategy before withdrawing any amount of money.

It’s also possible you might run into a problem when trying to get money in retirement. Certain issues, such as denied Social Security benefits, may need the help of a retirement lawyer.

Consider Your Retirement Age First

Timing matters. The right time to withdraw funds can depend on your specific situation. Most types of retirement accounts have rules about your age.

Even if you have a serious financial need during your working years, you’ll want to consider the downsides of an early distribution. A withdrawal before retirement can come with additional tax penalties. Only a few exceptions apply, such as early withdrawals for high medical expenses. Some plans allow hardship withdrawals for limited reasons. You would need to check your eligibility and the terms under your specific plan.

Your account balances also won’t rise as quickly if you leave less money to grow over time. If you haven’t reached the penalty-free withdrawal age yet, you may want to consider other financial options for debt.

Receiving a Defined Benefit Pension

In a defined benefit pension plan, an employer pays its employee a specific benefit for life beginning at retirement. The employer controls investment risk and pension management.

The benefit amount is calculated based on factors such as:

• Age
• Salary history
• Duration of employment

You may have to work for a specific length of time, sometimes 10 years, before you have a permanent right to the benefit. This is referred to as “vesting.” If you leave your job before fully vesting in your employer’s defined benefit plan, you won’t receive the full benefit from the plan.

Defined benefit pension plans often allow you to choose how you receive your benefits. Your choice can also affect your family’s financial future after your death.

Payment options include:

• Single life annuity: You receive a fixed monthly benefit until you die. After you die, no further payments are made to your survivors.
• Qualified joint and survivor annuity: You receive a fixed monthly benefit until you die. After you die, your surviving spouse continues to receive benefits (at least 50% of your benefit) until their death.
• Lump-sum payment: You receive the entire value of your plan in a lump sum. No further payments are made to you or your survivors.

Your monthly benefit may be significantly lower if you retire early or receive a joint and survivor annuity.

Withdrawing From 401(k) Plans

Employees may make contributions to a traditional 401(k) plan on a pre-tax basis and accrue earnings on a tax-deferred basis. This means you don’t pay state or federal income taxes on your savings or their investment earnings until you make withdrawals at retirement.

You may begin withdrawing money from your account at age 59 1/2 without receiving a penalty. You must begin making required minimum distributions (RMDs) from your 401(k) by the age of 73 — unless you’re still a full-time employee with the employer sponsoring your plan.

A Roth 401(k) follows an opposite tax basis. You pay taxes on contributions, but your withdrawals are not subject to income tax. The requirement to withdraw money at a certain age does not apply to a Roth account.

If you’ve changed employers and have multiple accounts, you may roll over your employer plans into an individual retirement account (IRA). This can allow you to move your savings into an account you manage more directly. Consolidating your retirement accounts can also help you keep track of your savings more easily.

Withdrawing From Traditional and Roth IRAs

Individuals can open their own traditional and Roth IRAs. You can contribute money up to a set maximum amount per year. These accounts differ in their treatment of taxes, which affects your withdrawals in retirement.

In a Roth IRA, your contributions are made with after-tax dollars, and your earnings grow tax-free. Taxes are due if you make withdrawals before you turn 59 1/2, which is known as the “early withdrawal penalty.” You’ll also owe taxes if the Roth IRA is less than five years old when you withdraw money.

Traditional IRAs and SIMPLE IRAs generally involve a tax deduction upfront. Unlike Roth IRAs, you must begin taking RMD withdrawals after you turn 73. When you do begin making withdrawals, you’ll owe ordinary income taxes. If you fail to make timely RMDs, or if you withdraw less than the required RMD amount, you may be subject to a 50% excise tax.

Are 401(k) and IRA Withdrawals Taxed as Income or Capital Gains?

If you withdraw from a traditional 401(k) or IRA, that money will be subject to regular income tax, not capital gains tax. The money you withdraw in retirement counts toward your annual income for taxes. Higher withdrawal amounts can raise your tax bracket, which determines your tax rate for the year.

Capital gains are generally subject to higher tax rates than ordinary income. This difference is one potential benefit of saving money in a retirement account rather than a regular brokerage account. In a brokerage account, you’d generally owe capital gains taxes based on its growth. The tradeoff is that you have fewer restrictions on withdrawing money from a non-retirement account earlier in life.

Remember that withdrawn money from Roth accounts is generally not taxable, as described above.

Problems With Your Retirement Funds

You’ll need access to your money and benefits in retirement. An unexpected obstacle could mean your money isn’t there for you when you need it most.

Getting legal advice is wise if you face certain problems in retirement, such as:

• Creditors are trying to claim your retirement funds, home equity, or other assets you own
• You’re getting a divorce and need to divide retirement savings equitably
• You made a mistake with reporting retirement income on your tax return and face an IRS audit
• You’re seeking Social Security benefits in addition to your pension or savings
• You want to protect your retirement savings for your beneficiaries in the event of your death
• You discovered fraud or mismanagement on the part of an employer, financial professional, or tax professional

The transition into retirement is a big change. Your life and finances may be very different now. With these changes can come new challenges and priorities. Some retirees work with attorneys to solve problems and plan for their family’s future.

Seek Legal Advice for Retirement

When taking distributions, it’s necessary to consider tax implications and your particular financial situation. You may want to contact a Social Security and retirement planning attorney. Visit FindLaw’s Retirement Planning section for additional resources.