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Turning 59½ is actually an important moment for your retirement savings. It means that you’ll have the freedom to access your 401(k)s and IRAs without early withdrawal penalties. And while that's good news, it shouldn’t start withdrawing funds right away, and probably need a better strategy. 

The timing is especially crucial for medical professionals, for instance, and others who've built up substantial retirement savings through their careers. You'll want to think about tax implications, your long-term income needs, and how to make your savings last.

That's exactly what we're going to break down for you. You'll learn when it makes sense to start withdrawing, smart ways to blend different retirement income sources, and strategies to avoid common tax pitfalls that catch many people off guard. So, let’s dive in. 

Understanding the 59 and a Half Rule

 59½ IRS rule rule means you can take money from your 401(k)s and IRAs without paying penalties once you hit that age. Before then you were looking at giving up 10% of your withdrawal to penalties — and that's on top of any taxes you might owe.

Penalties are a real concern for many people, as 41% of retirement account holders have taken early withdrawals, and about 11% have done it multiple times. That can really add up in lost retirement savings.

How It Works

When you turn 59½, you get a bit more freedom with your retirement money, yet you'll want to think about a few different things:

• With traditional IRAs, you won't face penalties anymore, but you'll still need to pay regular income tax on what you take out. That's because you got a tax break when you put the money in.

• 401(k)s work in a similar way, and you've got some options to think about. Pre-tax contributions will be taxed when you withdraw them — that's just how it works. But if you've got Roth contributions in there, you might be in for some good news on the tax front.

A Word About Early Withdrawals

Taking money out before 59½ can be tough on your retirement savings. Not only do you lose that 10% penalty, but you also miss out on all the growth that money could have earned if you'd left it alone. And while sometimes you might need to tap into those funds early, it's worth exploring other options first.

The more you know about these rules, the better decisions you can make about your retirement money. After all, we're talking about your future here, and having a solid plan for when and how to use these funds makes a real difference in the long run.

Traditional vs. Roth 401(k)s: What's Different at 59½?

When you hit 59½, knowing the differences between Traditional and Roth 401(k)s becomes really important, as 93% of employers now offer Roth 401(k)s, up from 62% ten years ago. That means you probably have both options available to you.

Traditional 401(k)s: The Tax-Later Option

With a Traditional 401(k), you're getting a tax break now and paying taxes later. The money goes in before taxes, which lowers your taxable income right away. But when you take it out after 59½, you'll need to pay regular income tax on every dollar. And once you hit 72, you've got to start taking money out whether you want to or not — those are called Required Minimum Distributions (RMDs).

Roth 401(k)s: The Tax-Now Option

Roth 401(k)s work a bit differently. You pay taxes on the money before it goes in, but then you get some good benefits: After 59½, you can take out both your contributions and earnings tax-free, as long as you've had the account for at least five years. And you don't have to take RMDs during your lifetime, which gives you more control over your money.

Understanding RMDs

Speaking of RMDs, they start at 72 for Traditional accounts. The amount you need to take depends on your account balance and the IRS life expectancy tables. And if you're still working and contributing to your employer's plan? You might be able to wait until you retire to start taking RMDs.

Managing Your Tax Situation

You might want to think about timing your withdrawals for years when your income is lower — that could mean paying less in taxes. Some people like to have both Traditional and Roth accounts to give themselves more options.

This flexibility can be really helpful when you're trying to manage your taxes in retirement. After all, having different types of accounts lets you control your taxable income better, and that's especially important when RMDs come into play.

Traditional IRAs Specifics

Age Requirement: When Can You Start?

It's pretty straightforward: you need to be 59½. Before that? You're looking at a 10% penalty on top of regular taxes. That's probably why only 5% of Traditional IRA owners under 59½ made withdrawals in 2022.

Withdrawal Types and Options

Once you're 59½, you've got more freedom with your withdrawals. You can take out any amount you want without penalties, though you'll still need to think about taxes, since those will apply to the amount withdrawn. So in that case it might be well worth it to consult a tax advisor. By the way, 90% of people taking withdrawals in 2022 were retired, so you're not alone in considering this option.

Tax Implications to Consider

When you take money from your Traditional IRA, it counts as regular income for that year. 

So your withdrawals get taxed at your regular income tax rate, which changes based on how much other money you make that year. If you take out a larger amount that might bump you into a different tax bracket, and it might catch you off guard if you're not prepared.

76% of people taking withdrawals stuck to their Required Minimum Distributions (RMDs). That's a smart way to manage your tax situation while meeting IRS requirements.

When you're thinking about your withdrawal strategy, consider spreading out larger withdrawals across different tax years. This could help you stay in a lower tax bracket and keep more of your retirement savings. And while taxes are inevitable, planning your withdrawals strategically can make a real difference in how much you get to keep.

Roth IRA Specifics

You've turned 59½, and now you're wondering about your Roth IRA options. Americans have put their trust in these accounts in a big way — we're talking about $13.6 trillion in IRAs by the end of 2023, with Roth IRAs making up $1.4 trillion of that. Let's break down what this means for you.

Getting Those Tax-Free Withdrawals

There are two things you'll need to check off for tax-free withdrawals from your Roth IRA:

• You've hit 59½

• Your account has been open for at least five years

About That Five-Year Rule

The five-year countdown starts when you make your first contribution. So if you opened your Roth IRA in 2020, you'll need to wait until 2025 to take out any earnings tax-free — and you've got to be 59½ or older. 

No Required Minimum Distributions

You don't have to take out money from Roth IRAs if you don't want to. Unlike Traditional IRAs, there are no required minimum distributions during your lifetime. You can let that money grow tax-free for as long as you want.

What About Your 401(k)?

Turning 59½ changes things for your 401(k) too. You won't face that 10% penalty anymore when you take money out. You've got options:

• Take it all at once

• Set up regular payments

• Roll it over to another retirement account

The Tax Situation

The way your withdrawals get taxed depends on how you put the money in: if you made pre-tax contributions, you'll pay regular income tax when you take the money out. But if you went with Roth contributions and you've had the account for at least five years, that money comes out tax-free.

Planning these withdrawals takes some thought — you'll want to think about how much you need, when you need it, and how it might affect your taxes for the year. Taking it step by step can help you make better decisions about your retirement savings.

Exceptions to Early Withdrawal Penalties

Sometimes life throws you a curveball and you need your retirement money before 59½. And while that's probably not ideal, there are actually some situations where you can get to your funds without paying those extra penalties. Let's talk about when that might work for you.

Medical Expenses

If your medical costs go above 7.5% of your adjusted gross income, you can take money from your retirement accounts without penalties. That can be a real help when those big medical bills start piling up.

When Disability Strikes

If you become permanently disabled, you won't face penalties for taking money from your retirement accounts. It's a provision that helps when you're dealing with a difficult situation and need access to your funds.

Setting Up Regular Payments

You can start taking money out early through something called substantially equal periodic payments, or SEPP. It basically means you're setting up regular withdrawals based on some specific IRS guidelines. The rules are strict about keeping those payments consistent, so you have to be very careful about this one and possibly get help from a financial advisor.

Buying Your First Home

If you are thinking about buying your first home you can take up to $10,000 from your IRA without penalties to help with that purchase (although taxes will still apply). That's often enough to cover a good chunk of your down payment or closing costs.

These exceptions are quite specific, and while they can be helpful in certain situations, you'll want to think carefully before using them: any money you take out now won't be there growing for your retirement later. But when you really need it, knowing about these options can make a difference in managing your finances.

Planning Ahead for Retirement Withdrawals

When you're getting close to 59½, it's time to think seriously about your retirement withdrawals. And if you are feeling a bit uncertain about it, you are not alone, as 53% of Americans say they're behind on retirement planning. Below are some things to think about. 

When to Take Your Money Out

Timing your withdrawals can make a real difference in how much you keep versus how much goes to taxes. You might want to spread out your withdrawals across different tax years, or maybe wait until a year when your other income is lower. Working with a tax advisor can help you figure out the best approach, especially when those required minimum distributions come into play later on.

Different Ways to Get Your Money

You can take it all at once if that works for your situation, or set up regular withdrawals to create a steady income stream. Each way has its own impact on your taxes and long-term savings, so it's worth thinking through what makes sense for you.

Matching Your Goals

Your withdrawal strategy should line up with how you want to live in retirement. That might mean taking smaller amounts to make your money last longer, or structuring withdrawals to handle bigger expenses in certain years.

Making Smart Money Moves

Financial planning gets a bit more complicated when you're dealing with retirement accounts, especially if you own a small business. Working with someone who knows these rules inside and out can help you avoid surprises and keep more of your money working for you.

Looking at the Tax Picture

Your withdrawals will probably count as regular income for taxes. That means taking out too much at once could bump you into paying higher taxes than you need to. Instead, you might spread out your withdrawals over several years to keep your tax bill lower.

The way you handle your retirement money can affect how comfortable you'll be later on. By thinking through these decisions now, you can create a strategy that works for your specific situation and helps your savings last. And while planning for retirement might feel overwhelming, taking it step by step makes it more manageable.

Final Thoughts

Managing money available at 59½ opens up new possibilities, but it also brings questions about withdrawals, taxes, and timing. While the rules might seem complex at first, understanding them helps you make more informed choices about your retirement accounts.

Taking money from retirement accounts — whether they're Traditional or Roth, IRA or 401(k) — means thinking about taxes, timing, and your long-term needs. And since each situation is different, what works for someone else might not work for you.

That's where professional guidance can make a difference. Technology has made connecting with financial advisors more convenient than ever. Platforms like FINNY can match you with advisors who understand the complexities of retirement account withdrawals and can provide guidance based on your specific circumstances.

Get matched with a financial advisor who can help you understand your options at 59½ and beyond.