If you take money out of your 401(k) or individual retirement account too soon or too late, you'll be penalized. There are also penalties if you claim Social Security and Medicare benefits early or late, respectively. Take care to avoid these five significant retirement penalties:
IRA early withdrawal penalty. If you withdraw money from your IRA before age 59½, you will generally have to pay a 10 percent early withdrawal penalty in addition to income tax on the amount withdrawn. So, if you withdraw $5,000 from your IRA at age 40, you’ll need to pay a $500 tax penalty. However, there are a variety of ways to avoid the 10 percent penalty. If you use the money to pay for college costs or purchase a first home (up to $10,000), the penalty doesn’t apply. You don’t need to pay the penalty if the distribution is for some specific circumstances, including significant medical expenses that exceed 10 percent of your adjusted gross income, purchasing health insurance after a layoff or paying for expenses associated with a significant disability. You can also set up a series of annuity payments from your IRA without incurring the 10 percent penalty.
Roth IRA owners can withdraw the contributions, but not the earnings, from accounts that are at least five years old without incurring the early withdrawal penalty. “If you have a Roth, that might give you the ability to get at that money penalty-free,” says Eleanor Blayney, a [CERTIFIED FINANCIAL PLANNER™] and the CFP Board’s consumer advocate. “You can withdraw without penalty if it’s money you contributed yourself.” Read more >
U.S. News & World Report
By Emily Brandon
March 3, 2014