If you're budgeting correctly, a good portion of your income is going towards retirement savings. But have you wondered when you can access that money and how? In this episode, we discuss when you can cash out your retirement accounts and how to minimize penalties and fees when you do it.
[00:00:00] Welcome to the more sense than Dollars podcast, where your host is Nick and Harry.
[00:00:15] What's up listeners?
[00:00:17] We got another episode for you.
[00:00:20] Today we are talking about how to withdraw money from a retirement account.
[00:00:25] We've been giving all this advice on recommendations, on how to contribute to retirement
[00:00:32] accounts and how much you should be contributing.
[00:00:35] But we haven't talked about when to take the money out or how to.
[00:00:39] So that's what this one's for.
[00:00:41] Are you ready Nick?
[00:00:43] Yeah.
[00:00:44] Looking forward to it.
[00:00:45] There's a lot of kind of little rules and gotches and different ages.
[00:00:50] You can do different things at so I know this is way in the future for most of our listeners.
[00:00:55] But it's one of those things good to get ahead of never too early to understand something.
[00:01:02] And a lot of these discussions in my experience tend to trigger, have thoughts about other
[00:01:07] things.
[00:01:08] Yeah.
[00:01:09] It could be a good jumping off point for some other retirement related things you could
[00:01:14] be interested in.
[00:01:15] We also learned a lot in doing the research for this episode, some of those rules and
[00:01:20] things to be aware of.
[00:01:23] We've said it a lot of times, but the IRS and taxes are not a place you want to mess
[00:01:27] around.
[00:01:29] And a lot of that comes into play in this.
[00:01:31] So we are not tax accounts, but we have some research that we've done that hopefully
[00:01:40] helps you out.
[00:01:42] First, why don't you instead of say your piece, why don't you give us your two cents?
[00:01:49] Yes.
[00:01:50] Then the new second title.
[00:01:55] This one is just on tax refunds, or should also not just tax refunds, but when you
[00:02:01] owe on your taxes.
[00:02:03] In my experience historically, the withdrawal when you owe taxes happens immediately.
[00:02:11] And then they take weeks on the flip side to give you your refund when they owe you money.
[00:02:19] That didn't happen to me this year.
[00:02:21] I actually got the refund from New York State only a few days after the Fed.
[00:02:27] That's good news.
[00:02:28] The money I owed.
[00:02:29] And it really is, they're not, you know, one of those coming from the state, one of them
[00:02:33] is coming from the Fed.
[00:02:35] But that is typically about the experience and wasn't the case this year.
[00:02:39] So that was nice.
[00:02:41] Nice.
[00:02:42] But it used to always make me so mad.
[00:02:45] They're so fast to take the money and so slow to get it back.
[00:02:48] I want to give credit for credit to you.
[00:02:50] Didn't happen.
[00:02:51] What about you?
[00:02:53] I've been doing doctors appointments recently and the, I feel like copays are going
[00:02:58] up or the amount that insurance is covering is going down.
[00:03:01] I haven't, my plan hasn't changed, but I don't know.
[00:03:04] It just feels like what's the point of insurance and not covering that much.
[00:03:08] There's still high copays.
[00:03:10] They only cover a portion.
[00:03:12] You have to pay another part.
[00:03:14] It's like, I don't know, starts to make all the premiums I pay.
[00:03:18] Not feel as valuable when I'm paying $50 copays for regular appointments.
[00:03:26] It's annoying.
[00:03:28] But that's what's on my mind.
[00:03:29] Healthcare stuff.
[00:03:31] Do you use like an FSA or anything?
[00:03:33] No, I don't.
[00:03:34] It is.
[00:03:35] Probably should.
[00:03:36] Is that at least it's pre-tax, right?
[00:03:39] Yeah.
[00:03:40] Yeah.
[00:03:43] All right.
[00:03:44] So for this episode.
[00:03:45] I think a good place to start is when can you withdraw without, well, you can withdraw
[00:03:53] with or without penalties.
[00:03:55] Do you start with without penalties for IRAs for one case?
[00:04:00] Yeah.
[00:04:01] And I guess before we get into that, I guess the answer to your first question is that
[00:04:06] you can withdraw from your retirement accounts whenever.
[00:04:10] Yeah.
[00:04:11] That's the real answer to it and a lot of people probably don't realize.
[00:04:15] But those are available to pull from whenever you want.
[00:04:19] There are just penalties if you do it at certain times.
[00:04:26] True.
[00:04:27] It's your money that you put into it, so you can take it out whenever you want.
[00:04:31] But you put it into those accounts for a reason you were getting a certain tax benefit
[00:04:35] or something and so then I'm just going to let you take it out for free.
[00:04:40] Right.
[00:04:41] I'll go back to the point.
[00:04:43] While we go through the non penalized withdrawals and then once we go through all the
[00:04:49] scenarios where you can withdraw it, penalty free, we can go over the penalties.
[00:04:53] Yeah.
[00:04:54] So okay.
[00:04:55] So let's break down the penalty free withdrawals into at and after retirement and pre-retirement
[00:05:05] because there are actually a few situations where you can pull out pre-retirement without
[00:05:09] paying the penalty.
[00:05:11] The most normal time and probably the best time is in retirement because that's what
[00:05:19] you had saved that money for originally.
[00:05:21] Right.
[00:05:22] And so when is that depending on the account, does it depend on how old you are?
[00:05:29] It is based on your age.
[00:05:31] Okay.
[00:05:32] So this is something right that can cause a bunch of different scenarios for different
[00:05:36] people.
[00:05:37] Sometimes you are not planning or you don't end up retiring until you are in your late
[00:05:42] 60s or early 70s, maybe you're a tire early in your 50s.
[00:05:47] None of those actual retirement dates matter for the most part for any of these withdrawals.
[00:05:56] It is by the age you are at when you make the withdrawal, not your employment status.
[00:06:01] Okay.
[00:06:02] That's pretty easy to follow.
[00:06:04] So for 401k's we're at 59 and a half.
[00:06:09] Yep, for that.
[00:06:10] I'll say these dates tend to change so we're not not often because it's a very hot political
[00:06:15] topic but the dates can change the ages.
[00:06:20] But as of recording this episode in April of 2024, for 401k's and IRAs, that penalty
[00:06:29] free age is 59 and a half.
[00:06:32] Okay.
[00:06:33] So any withdrawal you make after that, you're not going to pay any sort of penalty.
[00:06:38] Right.
[00:06:39] What it will still be taxes assuming it's not a Roth.
[00:06:42] You are going to pay income tax on that but there is no additional penalty on top of
[00:06:47] it.
[00:06:48] Okay.
[00:06:49] And HSA is a little higher?
[00:06:51] Yes, HSA is a little different because you can make withdrawals from that for medical purposes
[00:06:59] your entire life.
[00:07:01] But once you hit 65, you can take money out of the HSA for whatever reason you want.
[00:07:07] All right.
[00:07:08] What about this exception for 401k's?
[00:07:11] There are situations where if you're 55, you can take the money out.
[00:07:16] Yeah, this is a little bit of a weird example of one of these a lot or there's a lot
[00:07:19] of these kind of weird situation polls on.
[00:07:22] New on tax exceptions.
[00:07:23] That's a total of 10.
[00:07:24] Yeah.
[00:07:25] But they call it the rule of 55 and if you retire, lose your job or you're going to pay a lot of
[00:07:31] even just leave to take a new job when you are 55 or older, but not 59 and a half yet.
[00:07:39] You can withdraw from the 401k that was sponsored by the job UF's penalty free.
[00:07:47] All right.
[00:07:48] That's pretty cool.
[00:07:49] Yeah.
[00:07:50] That's important.
[00:07:51] That only applies to the 401k for the job that you've left after turning 55.
[00:07:56] Okay.
[00:07:57] So as a reminder, you can have a bunch of 401k's.
[00:08:01] Right.
[00:08:02] As long as you have more than $5,000 in a 401k, they can't close it on you.
[00:08:06] They have to keep it open.
[00:08:08] So if you haven't been rolling those over as you job hop, you've just been leaving them.
[00:08:13] You could have a bunch of 401k's.
[00:08:15] The rule of 55 only applies to the one belonging to the job UF.
[00:08:20] Right.
[00:08:22] And if you wait too long past 59 and a half,
[00:08:26] they may force you to take withdrawals.
[00:08:29] These terms called required minimum distributions.
[00:08:32] You might see RMD somewhere.
[00:08:35] So if you, I don't know, you have enough money saved from other things or you're still working.
[00:08:42] And you've passed that 59 and a half and are not taking withdrawals,
[00:08:47] dispersments from your IRAs or 401k's, then add around 72 or 73,
[00:08:54] depending on when you were born, they are going to force you to withdraw the money.
[00:08:59] And so that they're going to send you the money at some percentage of the account.
[00:09:10] But that's only 401k's and traditional IRAs, not for Roth IRAs.
[00:09:17] Right.
[00:09:18] If you're still alive.
[00:09:19] And that's going to depend on your brokerage too. It's not always automatic.
[00:09:24] You, you can be in a situation where you, you're required to take that.
[00:09:30] Required minimum distribution and you don't do it.
[00:09:34] They can penalize you on top of the requirement of them distribution.
[00:09:38] It's actually 25% of that.
[00:09:41] Minimum distribution. So it's an even higher tax penalty than withdrawing from the retirement to early.
[00:09:47] All right. So those are probably, I'd call them the ideal times to withdraw.
[00:09:54] It's taking out of retirement account at retirement.
[00:09:57] But these can be pretty big accounts.
[00:10:00] You've, you know, put a lot of your heart or money into them and life happens.
[00:10:05] Things come up.
[00:10:07] And so let's talk through a few of the times when you might be able to take money out of 401k or IRA
[00:10:15] without paying that penalty.
[00:10:18] And we'll get into what the penalties are in a second.
[00:10:21] But there are a few examples like if you're a first time home buyer,
[00:10:27] you can take 10,000 out of a 401k or IRA without paying a penalty.
[00:10:35] What else, birth of a child?
[00:10:38] Yep.
[00:10:39] Birth of a child or adoption.
[00:10:41] And that's every time that happens.
[00:10:44] So it's not a one-time being like buying a house anytime you have a kid.
[00:10:49] You could take five k out of your 401k or IRA.
[00:10:54] What else? Natural disasters?
[00:10:57] That's big one.
[00:10:59] Yeah, that one lets you take 22,000 out.
[00:11:02] Right.
[00:11:04] So we will, there's a whole list on the IRS website of all these exceptions to the penalty.
[00:11:10] There's an emergency personal expense.
[00:11:13] You can take 1,000 out every calendar year.
[00:11:16] Higher education expenses.
[00:11:18] Oh yes.
[00:11:19] That can only come out of your IRA, not your 401k.
[00:11:22] There's a little, some of them it doesn't apply to both.
[00:11:25] But we'll link that full list of all these situations.
[00:11:29] So, just this being said, I think we would both agree.
[00:11:34] You should avoid using your 401k or IRA for these purposes.
[00:11:40] This is not like a bonus where you're like, oh, I was saving up for a down payment.
[00:11:46] But now I know I can take 10k out of my retirement savings.
[00:11:50] You probably shouldn't do that.
[00:11:53] My thinking is this is like a backup emergency fund.
[00:11:56] Like emergency emergency.
[00:11:58] You've gone through the whole emergency fund and something happens and you really need it.
[00:12:03] To avoid credit card debt or something.
[00:12:07] Right, but yeah, you don't want to have to happen to this.
[00:12:11] You're losing all the future earnings on that money.
[00:12:13] Right, that's not, but it's not, it's penalty free, but it's not without consequences.
[00:12:19] You're dramatically, you're obviously not going to have the money you took out available later.
[00:12:24] You're also guaranteeing you lose all the potential growth on that withdrawal as well.
[00:12:28] So that's the 401k's and IRAs.
[00:12:30] Can you ever take anything out of an HSA?
[00:12:33] Early.
[00:12:34] Yeah, and that's generally what they're meant for.
[00:12:37] They've become very popular and attractive as a retirement account because of that triple tax advantage.
[00:12:44] We've discussed before with the HSAs.
[00:12:47] But their original purpose and the creation was to give people a savings account with
[00:12:53] with pre tax money that they can use for on the medical expenses.
[00:12:58] So at any point in your life, you can withdraw from an HSA for qualified medical expenses.
[00:13:05] That's another very long list.
[00:13:09] If you are familiar with the FSA, I think more people are eligible for those.
[00:13:14] It's generally the same list of things.
[00:13:18] That can be anything from foot like shoe inserts or like shoe orthotics.
[00:13:26] Birth control, the way you were just talking about the co-payments.
[00:13:33] Yeah.
[00:13:34] Pretty much any.
[00:13:35] It is a pretty stretchable list of things that are the place to.
[00:13:40] Whereables you could use your HSA to buy a ordering or a bit of something.
[00:13:47] Fitbit, right?
[00:13:49] So there's a pretty big list of things.
[00:13:52] But again, if you also have an FSA, you're probably going to want to use that first because
[00:13:57] There's limits in that is not a brokerage account.
[00:14:01] HSA has that triple tax advantage.
[00:14:04] So generally the longer you can leave things in there, the longer it will grow.
[00:14:08] But if you are contributing to the HSA with the intent to use it regularly for health expenses,
[00:14:14] Feel free to go ahead and do so.
[00:14:17] Cool.
[00:14:18] All right.
[00:14:19] So those are all the situations.
[00:14:21] If you're in any situation other than everything we just mentioned, which is retirement or those
[00:14:26] emergencies, situations, you're going to pay a tax penalty if you try to take out of these accounts before that retirement age.
[00:14:36] Right.
[00:14:37] What kind of damage are we looking at for 401k's in IRAs?
[00:14:40] That's a 10% penalty.
[00:14:43] So the IRS is going to take 10% of what you withdrew.
[00:14:48] Right.
[00:14:49] And you're going to take 100 off the top and then you're going to pay taxes on that thousand.
[00:14:58] And you have whatever's left over.
[00:15:00] Yep.
[00:15:01] Yeah, everything that's left becomes the taxable income.
[00:15:05] HSA already said that's 20% hit.
[00:15:08] That's taxable.
[00:15:09] That's not pretty big one.
[00:15:11] We already mentioned the minimum distributions for the required minimum distributions is 25%.
[00:15:19] So don't do it.
[00:15:22] Don't withdraw early.
[00:15:25] Yeah. Again, it's a worst case scenario type thing.
[00:15:29] The 10% penalty is still lower than what the interest rate you would be paying on a credit card is.
[00:15:37] Yeah.
[00:15:38] But you are also for going any of that potential growth.
[00:15:43] Yeah.
[00:15:44] If you're getting 8% on that money for years and years and you're giving up a lot more than just 10%.
[00:15:51] Right.
[00:15:53] And another consideration with your retirement accounts is it can be difficult to catch back up to like make up for the money that you withdrew.
[00:16:05] Right.
[00:16:06] So you've contributed.
[00:16:07] Right.
[00:16:08] If you've contributed, you know, you'd 6,000 two years ago, 6,500 last year to your off IRA.
[00:16:15] You have 1250.
[00:16:16] You withdraw all that for short term emergency.
[00:16:19] So you can't read deposit all 12,000 of that or 12,500.
[00:16:24] Right.
[00:16:25] You could only deposit up to that year's limit for contributions.
[00:16:29] And so it's not something you can easily undo at that point.
[00:16:33] You have to be, is it 50 or over to get into that catch up period?
[00:16:38] I think, right?
[00:16:39] Yep.
[00:16:40] Where you can add a little bit more than usual.
[00:16:43] And even then, it's only, it's an extra 500.
[00:16:47] Right.
[00:16:48] For an extra battle.
[00:16:49] Great.
[00:16:50] It's not a, you're not catching up multiple years.
[00:16:54] So.
[00:16:55] Okay.
[00:16:56] So let's say we did the right thing.
[00:16:57] We're a patient.
[00:16:58] We waited until retirement and now you want to withdraw.
[00:17:03] This is going to be your income probably supplementing your income that you've been saving for all this time.
[00:17:09] You're going to contract your brokerage and say,
[00:17:12] I'm 50, nine and a half.
[00:17:14] I'm ready for my money.
[00:17:16] And they're going to give you distributions.
[00:17:19] You can depending on the brokerage or the account.
[00:17:22] You can decide, do you want it monthly quarterly?
[00:17:24] I think some can do annually if you want to pull it all out at one for the year.
[00:17:28] But then remember anything you pull out is not getting any growth in the account.
[00:17:34] So yeah, what do you have any thoughts on that monthly quarterly verse annually potentially?
[00:17:40] I think monthly is the most common.
[00:17:42] Yeah, quarterly wouldn't be so bad if you're trying to plan things out and want to make sure that money is super safe.
[00:17:48] If there's a catastrophic stock market collapse.
[00:17:53] But I don't know.
[00:17:54] I think monthly is the easiest or safest.
[00:17:56] It's the money still growing well.
[00:17:58] It's in the industry.
[00:17:59] Yeah, we're still giving the rest time to grow.
[00:18:01] I mean, I had kind of justification for the quarterly is potentially if you were going to make a big purchase.
[00:18:08] Oh yeah, yeah, that's a good monthly.
[00:18:09] What didn't cover?
[00:18:11] Mm-hmm.
[00:18:12] But I don't think we've mentioned this yet.
[00:18:14] The selection for how often year withdrawals happen can only be changed once a year.
[00:18:20] Oh, yeah.
[00:18:21] So you kind of have to decide that.
[00:18:23] So if you want that full quarterly payment to buy something or to splurge ahead of time,
[00:18:30] you're locked into that for the next year and then you can re-evaluate and potentially go back to my list.
[00:18:35] I guess what you could do is make one like make your 401k quarterly and your IRA monthly or something.
[00:18:41] Yeah, you can play around with that again.
[00:18:44] It's per account.
[00:18:46] Mm-hmm.
[00:18:47] Uh, and then so they're getting these distributions penalty free, but depending on the account,
[00:18:54] remember all the tax deferred contributions you made into the 401k or the traditional IRA.
[00:19:01] You were deducting all that in your taxes.
[00:19:03] Now it's come time to pay that as income tax.
[00:19:08] All right.
[00:19:10] And so these basically, these withdrawals become your paycheck.
[00:19:14] Yeah, I think that's a good way to think of it.
[00:19:16] It's like you're just reporting that as income for that year.
[00:19:21] So anything that went in pre-tax and as you withdraw it, it's time to pay tax on it for income.
[00:19:27] So that's, you know, your federal income tax or state income tax, local tax.
[00:19:32] Yeah, so how does that work?
[00:19:34] Because you don't get, you do your taxes once a year, but with holding happens on your pay tax,
[00:19:40] they're estimating how much they should hold, kind of estimating what you're going to owe
[00:19:45] for your taxes on that year.
[00:19:46] How does that work with retirement account withdrawals?
[00:19:49] Yeah, luckily the accounts will set aside some of that for you in the same way.
[00:19:55] Like if you're collecting unemployment, you can ask them to withhold money.
[00:19:59] So you don't have to set it all aside yourself for taxes.
[00:20:02] It would like a 401k distribution.
[00:20:05] There is a mandatory 20% that the federal government is making sure gets withheld.
[00:20:11] So they're going to hold your brokerage is going to hold 20%.
[00:20:17] For you so that you don't get in a situation where you spent all of it didn't set any aside
[00:20:23] and the IRS cannot collect anything from you at tax time.
[00:20:29] For IRAs, I think it's 10%.
[00:20:34] It's the common, but you can adjust that up or down depending on what you want.
[00:20:41] Right?
[00:20:42] It's not a mandatory minimum with a traditional IRA.
[00:20:46] Yeah, remember that IRA? There's nothing.
[00:20:48] You already paid taxes when you contributed.
[00:20:51] So if you're withdrawing from Roth and you're after that 59.5,
[00:20:57] you just get that money. You already paid the tax burden.
[00:21:03] So that's the one caveat there.
[00:21:06] We just mentioned that with holdings, that was just for federal income tax.
[00:21:12] On the state income tax level, it's state by state.
[00:21:15] Yeah.
[00:21:16] So some states will require retirement withdrawals made by an account within that state.
[00:21:22] You have the state tax withheld.
[00:21:25] Some of them don't.
[00:21:26] And so you're going to have to check how that is handled depending on the state you're in.
[00:21:31] And you may need to keep track of the taxes you'll potentially owe the state when it comes time to file.
[00:21:39] All right, so you're taking these distributions.
[00:21:41] You're setting some aside.
[00:21:43] You're probably wondering how much should I be taking out safely.
[00:21:46] You know, you have your expenses that you want to cover,
[00:21:49] but I also don't want to run out of the balances that I've saved up before I die.
[00:21:56] So they've, the scientists and mathematicians have done the work for you.
[00:22:02] They analyze the stock market over years and years.
[00:22:05] And found that 4% is a safe number to withdraw.
[00:22:10] So in the first year you retire.
[00:22:13] You take out 4% of your savings of the account.
[00:22:19] You have a 95% chance of having enough to cover at least 30 years of retirement.
[00:22:25] So you may have more than that if the stock market does 8 to 10% for the 30 years here in retirement.
[00:22:33] Then you're great, but if there are some down years in there, 4% is a safe number.
[00:22:39] That's why when we're figuring out how much we need a retirement,
[00:22:42] they usually use 4% to work backwards into your total.
[00:22:50] You then every year increase whatever the inflation rate is.
[00:22:55] Increase that original number by inflation and you'll still be okay.
[00:23:00] Alright, so there's a lot of nuances here.
[00:23:03] A lot of tax rules.
[00:23:04] We will link to some of these IRS sites that give exceptions and things.
[00:23:09] And there's more nuances than we covered, but those are the basics on when to safely withdraw money.
[00:23:18] And how to do it.
[00:23:20] So hopefully you have a little more of an understanding of how this whole system works.
[00:23:25] We carry out at the beginning, we just went a lot of time talking about retirement savings.
[00:23:30] That's the beginning of your career, but trying to bring a full circle here.
[00:23:34] So you can see how those decisions you make early on are going to be impacted when it's time to retire.
[00:23:41] Yeah, good point, love it.
[00:23:43] Alright, everybody.
[00:23:45] Thank you very much for listening and we will see you in the next episode.
[00:23:50] You've been listening to the more sense than Dollar's podcast.