Early retirees (before age 59 and a half) were liable to pay up to 10% penalty. But, the new IRS rule seems to bring relief in this area. Now, early retirees can receive a greater penalty-free withdrawal amount. However, financial experts say people still need to explore their options.
Scenario before the new IRS rule
Before the new rule, withdrawals from individual retirement accounts caused them to pay a 10% penalty alongside levies. However, there were some exceptions, such as SERP. It is a series of payment distributions up to the age 59 and a half or for 5 years. This payment series was addressed as 72(t). An individual’s SERP calculation method factors their account balance, age of the individual or account beneficiary, and a reasonable rate of interest.
What new guideline says?
As per CNBC, previously, the IRS was working to match the interest with the federal-mid-term rate of the past two months.
But, now individuals can use a 5% higher rate which will show a significant boost in payments.
Note that you need to follow the defined rules by the IRS to receive this greater interest rate. Otherwise, you will have to pay a 10% penalty across all your payments. Moreover, it could come with the added weight of interest and underpayment fees.
The rule of 55
People aged 55 can leverage the advantages of “the rule 55” as a better option. The rule allows you to skip any fees for early withdrawals from your existing 403(b) or 401(k). However, you have to be at exact age of 55 (not about to become 55) or older while resigning from the job. Some qualified public service workers can get the same benefit at the age of 50 as well. The 55 rule is adequately flexible as there’s no defined payment amount or schedule.
Ensure you can afford retirement at an early age before you come to terms with new IRS rules. It would be wise to contact the tax professional and a financial advisor for better advice. They can work with you to help minimize 10% penalties and levies.