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|How can I avoid early withdrawal penalties?
By The-Adviser.com -
- The Internal Revenue Code
states that, depending on your plan's provisions, you may receive a distribution from your
You could avoid the 10% penalty for early distributions if you are under age 59 1/2 and take the distribution as part of a series of substantially equal periodic payments made (at least annually) for the life expectancy of you or the joint lives or joint life expectancy your designated beneficiary. These payments must continue for the longer of five years or until age 59 1/2. So, if you retire at age 53, you would have to continue the payments until at least age 59 1/2 before you could change them. If you did this, you would pay ordinary income tax on the distributions but no 10 percent penalty. This type of distribution may or may not be available to you under the terms of your 401(k) plan. You should contact the plan administrator to determine what forms of distribution are available.
If the only way to receive the money from your plan were in the form of a lump sum, one of your options would be to roll it to an IRA and begin receiving distributions under the substantially equal periodic payment method.
You may also be able to take a distribution from your 401(k) account without incurring a 10 percent early withdrawal penalty if you are at least age 55 and separating from your employer. This does not mean someone could leave their employer at age 54, leave their money in the 401(k) account until age 55, and avoid the 10 percent penalty. If you choose to do this, all of your pre-tax contributions, company match (if any) and any earnings that are part of the distribution will be subject to ordinary income tax.
There is no penalty if you can take a series of equal periodic payments even if you are under age 59 1/2.
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