Retirement accounts like 401(k)s and IRAs are by far the most popular way Americans prepare for retirement. After working and investing in the plans over the course of many years, the account holders get to enjoy the fruits of their labors upon retirement in the form of distributions. However, retirees have several options for how they take those distributions, and some are more financially advantageous than others. A Springfield elder lawyer can help those planning for retirement decide what’s best for them in their situation. 

Types of Distributions 

Every retirement account allows for distributions, but there are several different types of account distributions. Some of these may be determined by the retirement accounts, while others are based on the age of the account holder. The most common types of account distributions include: 

• Normal distributions: Occurs when the account holder takes a distribution from the account after they have reached retirement age. That age differs from plan to plan, but in most cases, the age is 59 ½. 
• Early distributions: Distributions taken from the account before the account holder reaches retirement age.
• Required Minimum Distributions (RMDs): The minimum amount the account holder must withdraw from the account each year. RMDs for IRAs and 401(k)s begin at age 72 or 73 for those reaching age 72 after December 31, 2022. 
• Periodic distributions: Distributions that occur on a regular schedule.
• Lump sum distributions: A one-time distribution instead of periodic distributions.
• Rollover distributions: Distributions the account holder makes from one account for the purpose of distributing into a different account.  

Some account distributions incur taxes and penalties, while some account holders can face penalties for failing to take a distribution. 

Distribution Strategies 

Retirement account distributions are treated as income; as such, retirees must be strategic about how they choose to withdraw funds and how they use them. Most retirees choose from among the following types of account distribution strategies: 

• The 4% withdrawal rule: A strategy where the account holder withdraws 4% of their retirement savings in their first year of retirement. Every year thereafter, the account holder increases that percentage slightly to account for inflation.  A wealth protection strategy that allows the account holder to live off of the interest without affecting the value of the principal. 
• Fixed-dollar withdrawals: Occurs when the account holder withdraws a fixed dollar amount each year.
• Fixed-percentage withdrawals: Occur when the account holder withdraws a set percentage of their account annually. 

Will You Face Taxes or Penalties on Your Distributions? 

Withdrawing money from a retirement account is not always tax-free or penalty-free. Early distributions or withdrawals — those taken before reaching the age of 59 ½ — are subject to an additional 10% tax. Normal account distributions from 401(k)s and traditional IRAs are taxed as ordinary income but are not subject to any additional penalties. Distributions from Roth IRAs that the account holder has owned for more than five years are not subject to taxes or penalties. 

Set Up a Plan That Works for You With Help From a Missouri Elder Lawyer

For more information about planning for withdrawals on your retirement accounts, please contact a Springfield elder lawyer at LifeGen Law Group by calling 417-823-9898 or by using our online contact form.