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Rules on Retirement Account Withdrawals

Avoid penalties by tapping the right funds at the right ages.

Q: Please explain the 59 1/2 age rule that pertains to retirement account withdrawals. Does it mean that a qualified withdrawal is penalty-free if you are 59 1/2 or older? Also, can someone who reaches 59 1/2 take money out of a 401(k) plan for no reason at all? —Joan, Connecticut

A: The Internal Revenue Service uses two ages that apply to withdrawals from any retirement account. While there are some exceptions to the rules, those who are 59 1/2 or older can begin making withdrawals from retirement accounts without penalty. Those 70 1/2 and older "must" begin making at least the required minimum withdrawals from retirement accounts or otherwise suffer a penalty. While conforming to these age rules avoids incurring a penalty, with few exceptions you still have to pay income taxes on the withdrawn money.

With your 401(k), you can make withdrawals when you’re 59 1/2 or older if you are no longer employed by the company. If you are still employed, most but not all plans allow for distributions of 401(k) funds over age 59 1/2. Some plans require that you've worked there a certain number of years. Others only allow withdrawals of what you've personally put in, not earnings or matching contributions by your employer. Some don't allow for in-service withdrawals at all.

Since each plan is different, you'll need to check with your human resources department or the 401(k) plan administrator. If withdrawals are permitted, then taxes will still be due, which can take a big bite out of your plan balance. So consider what the tax implications might be before accessing those assets.

All the information presented on AARP.org is for educational and resource purposes only. We suggest that you consult with your financial or tax adviser about your individual situation. Use of the information contained in this website is at the sole choice and risk of the reader.

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