Retirement Plan Myths

Learn the 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 IRS. 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.

4. It's a good idea to name your "estate" as beneficiary of your 401(k) or other retirement plan. Generally speaking, it is not a good idea to name your estate as a beneficiary of your retirement plan. There are few advantages to this practice, and many disadvantages. Naming your estate as beneficiary can limit the options your heirs will have for taking money out of your retirement plan after you die. For example, your spouse might not be able to roll over the plan into his or her own IRA.

5. You cannot change the beneficiary of your IRA after you turn 72. You can always change your beneficiary. It's up to you to decide who gets your money after you die.

6. Every year after you turn 72, you are required to take money out of your 401(k). This is the general rule for 401(k)s and IRAs. However, if you continue to work past age 72, you are not required to take money out of your current 401(k) until you actually retire, unless you are an owner of 5% or more of the business. This does not apply to 401(k)s from previous employers.

7. If you are 72, you are required to take money out of each IRA you own. If you own several IRAs, a special rule allows you to calculate the amount that you are required to take from each IRA and then take the grand total from just one. Or you can take the total from several IRAs in any amounts you like.

8. If your children are the beneficiaries of your 401(k) or other retirement plan, they can roll over the plan into their own IRA when you die. A spouse is the only beneficiary who is allowed to roll over your retirement plan into his or her own IRA. No other beneficiary may do so, not even your children.

9. If your children are the beneficiaries of your IRA, they must take all the money out of the IRA immediately after you die and pay taxes on it. Most beneficiaries will be required to deplete your IRA within 10 years of your death. There are a few exceptions for minor children (who will have 10 years after they are no longer minors in which to take all of the money out), disabled individuals, and individuals who are no more than 10 years younger than you. (For more on this topic, see How the SECURE Act Affects Your Retirement and Estate Plans.)

10. No distributions are ever required from a Roth IRA. Although you are not required to take distributions from your own Roth IRA during your lifetime, all beneficiaries except your spouse must begin taking distributions after you die.

11. If you convert your traditional IRA to a Roth IRA and then withdraw some or all of the converted amount in the next couple of years, those amounts could be subject to income tax. Converted amounts are never subject to regular income tax after the year of conversion. You already paid the tax. However, they might be subject to an early withdrawal penalty if you take the money out too soon after the conversion and if you are younger than age 59-1/2.

12. Once you reach age 72, you must take a specific amount out of your IRA each year—no more, no less. The amount that you are required to take out of your IRA after age 72 is a "minimum" required amount. You may take more, but you may not take less.

To learn everything you need to know about withdrawing money from your retirement plans, see IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out, by Twila Slesnick and John C. Suttle (Nolo).

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