Retirement Account Withdrawal Tips

401k retirement withdrawal tips

If you’ve been doing your research on the best ways to set up your retirement accounts you’re already way ahead of most people. Retirement accounts such as 401k and IRA are great ways to save for your future, but withdrawing from them can be tricky.

Setting the accounts up and contributing to them is only half the battle. The fact of the matter is that withdrawing from your accounts can lead to unnecessary penalties and taxes if you’re unprepared.

Years of diligent savings can vanish due to penalties and unforeseen taxes. This is why it is important to know not only how to contribute to your accounts, but how to withdraw from them when the time comes.

This article will show you how to avoid extra fees and penalties you might not have been prepared for. By following these easy retirement account withdrawal tips you will be far more prepared for retirement than your peers.

Don’t Get Penalized for Early Withdrawals

This first tip is simple, but it can be devastating if not followed. The early withdrawal penalty on a traditional IRA is 10%.

It would be nice if there was just one rule for all retirement accounts, but unfortunately every account type has different rules. For example, to withdraw funds penalty free from a traditional IRA you must be 59 ½, but you can withdraw from a 401k at age 55.

Ultimately, you must carefully research the rules of your retirement account. A 10% penalty is a serious fee, and it is easily avoidable.

Rollovers for Moving Funds

Keeping track of many little accounts can be a pain, and might lead to making costly mistakes. Using a rollover to keep your funds together might make handling your retirement a little bit easier for you.

Moving funds between accounts can be devastating if done incorrectly. You could potentially have to pay a 20% income tax on withdrawn funds.

The good news is that by using a direct rollover, you can avoid unnecessary fees and taxes.

With a direct rollover, your financial institutions will handle the moving of funds for you, so you don’t have to worry about making any mistakes.

Don’t Forget About Your Required Minimum Distributions

Some retirement accounts have RMDs. Both the traditional 401k and traditional IRA set their RMDs at age 70 ½. If you miss a withdrawal, the penalty is 50% of the RMD.

It doesn’t matter how you take the RMD, you can take one lump sum for the entire year or set it up as monthly payments.

If you don’t want to make withdrawals at the required age, check to see if you qualify for an exemption. For example, you can delay your RMD from a 401k if you are still working. All retirement accounts have different rules, so be sure to check for your specific account type.

Don’t Take Two Distributions In the Same Year

Your first RMD is due by April 1st. All RMDs after that are due by December 31st. By waiting until the last minute to withdraw funds, you are forcing yourself to take two distributions in the same year.

While this won’t be a devastating loss, it is usually better to avoid it. The reason is that taking two distributions in the same year you will have to pay more in taxes. The worst case scenario being bumped into a higher tax bracket.

Don’t worry about making withdrawals early, there are actually tax incentives to do so, which leads us to our next tip.

Withdraw Funds Before You Have To

Technically, you don’t have to start taking withdrawals until after age 70 ½, but it could be a smart tax decision to start earlier.

Taking withdrawals earlier will spread your tax bill out over a longer length of time. This will help you stay in a lower tax bracket, thus reducing your overall tax bill.

While it may be tempting to leave your funds in your account to earn interest, it may be better over the long run to take them out early. This will, of course, depend on your specific tax situation. Sometimes it’s just not possible to withdraw early.

Only Withdraw the Minimum

You are allowed to withdraw more than the RMD, however, it’s usually a better choice to only take out the minimum.

This will allow you to keep more money in your accounts which will help generate income. Additionally, it will help keep you in a lower tax bracket.

Following this tip is not always possible as you will need to be able to afford to do it. If you have to take out more to get by or to live comfortably, then by all means take out how much you need.

Spend Accounts In the Right Order

If you want to make withdrawals, but have multiple retirement accounts you might not know where to start. The order in which you spend accounts actually makes a difference.

The basic strategy for withdrawing from accounts is as follows:

  1. Any RMDs you have to take.
  2. Taxable accounts
  3. Tax deferred accounts, such as traditional 401k and traditional IRA
  4. Tax exempt accounts, such as the Roth 401k and Roth IRA.

You may have noticed that the sequence above suggests you take withdraw from tax deferred accounts before tax exempt accounts. While this may seem counter intuitive, there is solid reasoning behind it.

Roth accounts don’t have RMDs, so while you use the funds from your traditional 401k or traditional IRA, your Roth accounts will continue to earn interest. And as an added bonus, those earning will be tax free because they came from the Roth account.


There is as much to be aware of when withdrawing funds as there is when setting your accounts up. Taking the time to understand it will save you from wasting your hard earned money.

Given the complex nature of retirement planning, it is highly recommended to speak with an expert adviser. A good adviser will help explain the complicated retirement process in a way that you will easily understand.

One comment

  • This is some really good information about withdrawing money from a retirement account. It is good to know that it would be smart to only take out the minimum amount of money. That does seem like it would help the money last longer.

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