Can I Tap My Pension Plan Early?

Unlike a 401(k), you are not permitted to take out a loan with a traditional pension plan. You’re not even allowed to make an early withdrawal either.

In short, most pensions won’t let you withdraw funds until you reach retirement age. On average, that’s at the age of 65. But, most pension plans give you the option to begin collecting early retirement benefits as early as age 55.

However, what happens if you want to receive benefits prior to reaching full retirement age? The size of your monthly payouts is going to be less than it would have been if you’d waited.

It’s suggested that you sit down with whoever runs your plan to create a simple table that will display how your payments will vary depending on when you begin withdrawing.

What if you really need to get your retirement early because of a financial emergency?

Getting Your Retirement Early.

“If you need to dip into a retirement account — whether it’s a 401(k), IRA, or something else — before you retire, you will likely pay the penalty,” explains the folks at NOLO. “However, there are a few ways to avoid the penalty.”

Let’s say that you take a distribution from your retirement plan early. With most retirement plans, that means the day you turn 59 ½. If you do, you’ll probably get slapped with a 10 percent early distribution tax above and beyond any regular income taxes you may owe on the money.

“That extra 10 percent might be called a tax, but it looks and feels like a penalty,” explains the NOLO team. “In fact, the early distribution tax is the cornerstone of the government’s campaign to encourage us to save for retirement — or put another way, to discourage us from plundering our savings before our golden years.”

“Of course, it’s generally a bad idea to dip into your retirement plan early except in extraordinary circumstances,” they add. “But when using your retirement funds is your only option, it’s good to know that there are several ways to avoid the extra 10 percent tax on early distributions.

Ways to Avoid the Extra 10 Percent Tax on Early Distributions

  • If you have an IRA, the substantially equal periodic payment exception is available. It allows you to withdraw early and receive annual installments spread out over your life.
  • If you leave your job before the age of 55, “you will not have to pay an early distribution tax on any distribution you receive from your former employer’s retirement plan.” You will be responsible for income tax, though.
  • Dividends from an employee stock ownership plan, or ESOP, are not subject to the early distribution tax.
  • A portion of medical expenses could escape the early distribution tax.
  • Qualified Domestic Relations Order (QDRO), such as child support or alimony, are not subject to the early distribution tax.
  • “If you receive a refund of a contribution to your retirement plan because you contributed more than you were permitted to deduct during the year, those ‘corrective’ distributions will not be subject to the early distribution tax, although they might be subject to other taxes and penalties.”

Before you begin making withdrawals, make sure to speak with a financial advisor and whoever manages your retirement plan. These professionals can further help you avoid expensive penalties or retirement planning mistakes, like withdrawing from retirement accounts.

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