With all of the different rules and regulations for 401(k)s, IRAs, and Roth IRAs, it can be difficult to remember at what ages you can start using retirement funds from your various accounts. Taking distributions too early or too late can incur stiff penalties you don’t want as burdens against your savings. Whether you retire at 45 or 85, you should keep these three ages in mind when deciding what to do with your retirement funds.
Age 55—This is the earliest you can take distributions from a 401(k) without penalty. However, there are stipulations to this allowance. First, you must retire in the year you turn 55, or after, to access the funds between ages 55 and 59. If you retire before age 55, you won’t be able to access your funds until you are 59 ½. Second, if your 401(k) is through a previous employer that you are no longer working for, you may or may not be able to access funds at age 55. If you left that employer at or after age 55, then you can take penalty free distributions. If you left that employer before age 55, then you will have to wait until 59 ½ to take a distribution from that account. Last, you must keep your funds in the 401(k) account. If you try to roll the funds over into an IRA, the IRA rules will apply and you won’t be able to access the funds early.
Age 59 ½–At this age you can start taking penalty free distributions from an IRA or Roth IRA. Keep in mind that distributions from a traditional IRA will count as taxable income and may bump you to a higher tax bracket depending on the amount you withdraw. Technically you can take a penalty-free distribution on a Roth IRA at any age as long as the account has been open for five years or more. If the account is less than five-years-old, you will have to pay taxes on any distributed earnings from the account. Most financial advisors would recommend still waiting until age 59 ½ to avoid unforeseen penalties and to allow the funds to grow further in the Roth account.
For a 401(k), age 59 ½ is a little tricky. If you are still working at age 59 ½, you may start taking distributions from an old plan, but distributions may be prohibited from a company you are currently working for. Some plans allow in-service distributions, but others do not. If you are retired at 59 ½, you are free and clear to take distributions from a 401(k).
Age 70 ½–Whether or not you have taken distributions in the past, traditional IRA and 401(k) accounts will start required minimum distributions (RMDs) at this age. RMDs are calculated each year by your life expectancy and how much money is in the account. If you are still working at this age, some 401(k) plans make an exception to this RMD regulation. Roth IRAs don’t have RMDs since this rule only applies to tax deferred accounts.