Withdrawals

You may withdraw funds from your retirement accounts, commonly known as “Distributions”, at any time.

Traditional Retirement Accounts (Pretax Contributions)

All Distributions received from your Traditional retirement accounts will be reported on a Form 1099-R for that tax year, with Code “7” recorded in Box 7 to indicate that these were normal distributions and must be included in your taxable income.

If you are under age 59½, such Distributions may also be subject to a 10% Federal early withdrawal penalty tax calculated on your Form 1040 tax return, unless such Distributions qualify for one of the IRS exceptions listed here:  https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions .  Generally, it is not prudent to take early Distributions from your retirement accounts, as these funds will no longer be invested to capitalize on The Power of Compounding.

You received a reduction in your taxable income in each of the years that you made such pretax contributions into your retirement accounts.  Once you begin to take Distributions from your Traditional retirement accounts, you will need to pay Federal and State income tax (Massachusetts residents only) on the amounts withdrawn.

Income Tax Withholdings

If you expect that your Distributions may be substantial (i.e., > $25,000 per year), it would be a good idea to speak with your retirement account fiduciary to have Federal income tax of 10%-15% (and for Massachusetts residents only, Massachusetts income tax of 5%) withheld from your Distributions to avoid receipt of an unexpected income tax bill in April.

Roth Retirement Accounts (After Tax Contributions)

You may withdraw the contributions that you made into your Roth IRAs, 401(k) and 401(b) retirement plan accounts at any time, for any reason, without incurring and income tax or penalties. This is because you made those contributions with after-tax dollars, so you've already paid income taxes on that money.  This is one of the key reasons why Roth retirement accounts make such good after-tax savings accounts for teenage children, and for that matter, for all of us.

All Distributions from your Roth retirement accounts will be reported on a Form 1099-R for that tax year, with Code “B” recorded in Box 7 to indicate that such distributions were received tax-free as qualified distributions from designated Roth accounts.

The IRS rules for withdrawing the earnings from Roth IRAs, 401(k) and 401(b) retirement plan accounts are different, however.  You may withdraw the earnings that were reported in your Roth IRAs, 401(k) and 401(b) retirement plan accounts at any time, if both of the following conditions are true:

  1. You are at least age 59½, and
  2. b.  It’s been at least five years since you first made contributions into any Roth IRA (the “Five-Year Rule”).

Any Roth earnings Distributions received if either of the above conditions are not met will be subject to the same 10% Federal early withdrawal penalty tax calculated on your Form 1040 tax return, as described under the Traditional Retirement Accounts (Pretax Contributions) section above.

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