Top Myths About Retirement Plans
by
Twila Slesnick, PhD, Enrolled Agent
Learn the true facts about retirement plans -- including withdrawals, distributions, beneficiaries, and rollovers.
1. You cannot take money out of your 401(k) plan until you retire. The general rule is that any money you take out of your 401(k) plan before you reach age 59 ½ is an early distribution. This means that you will have to pay a penalty plus income tax on it. Many plans have exceptions to this rule, however, and will let you take your money out early (and penalty free) in some circumstances - for example, to pay medical expenses. Some plans will even allow you to borrow money from your plan without penalty. Check your 401(k) plan documents to see which early distributions your plan allows.
Keep in mind, however, that there are no free rides when it comes to the I.R.S. Even if you escape a penalty on an early distribution, you must pay income tax on the money.
2. If you take money out of your traditional IRA before you are 59-1/2, you will always pay a penalty. There are many ways to get money out of your IRA without paying a penalty. You can take the money in installments over your life expectancy no matter how young you are. You can also take money out for certain college expenses or to help buy a first home. Don't forget, however, that even if you are allowed to take money out of your traditional IRA without paying a penalty, you must still pay income tax on the money.
For more information about how to do this, see Getting Your Retirement Money Early -- Without Penalty.
3. When you make withdrawals from your traditional IRA , you must take cash. You cannot take shares of stock, corporate bonds, or certificates of deposit. You are permitted to take "property" such as stock shares or corporate bonds out of your IRA instead of selling them first and taking the cash. This rule is helpful when you want to continue to hold certain securities.
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