Eligible to Withdraw from your Retirement Accounts? What You Need to Know

Reaching retirement can feel surreal—after decades of careful saving and planning, it’s finally time to start withdrawing from your nest egg.

If you’ve reached or are nearing age 59 ½, the eligible age to withdraw from retirement accounts, it’s important to understand the ins and outs of withdrawals. Even if you’re not ready to start taking money out of your accounts, knowing the basics can help you avoid penalties and stretch your savings. Plus, strategic withdrawals can help you optimize tax efficiency, reach your investment goals, and bridge income gaps as you transition from working to living on a fixed income.

Keep reading to learn how to make smart withdrawals from your retirement accounts, either now or further down the line. We’ll walk through important withdrawal considerations at two milestones: When you are first eligible to withdraw from retirement accounts at age 59 ½, and then at age 73, when required minimum distributions apply to many accounts.

What to know at age 59 ½: Withdrawal strategies and taxes

You may think of 62 as the magic number for retirement distributions—after your 62nd birthday, you can start tapping into Social Security benefits—but 59 ½ is the minimum age for penalty-free distributions from many retirement accounts, including IRAs and 401(k)s.

That means you can start pulling funds from your retirement accounts six months after your 59th birthday without facing fees. Withdrawals before then may incur a 10% penalty and may also be subject to state and federal tax.

Whether you’re newly retired or planning to work for years to come, this age brings opportunities to optimize your retirement savings. Here are a few options to consider:

1. How can I optimize my savings while I continue to work?
Still planning to work into your 60s? Some people take advantage of the period after they turn 59 ½ to start making in-service rollovers. These are rollovers from an employer-sponsored 401(k) plan into personal IRAs or other investment accounts.

Moving your money this way can help expand your investment opportunities while you’re still working—all without incurring any penalties for withdrawing money from your 401(k) and moving it into a more useful investment. Before you withdraw from retirement accounts, consult with a trusted financial professional to ensure your plan doesn't result in surprise fees.

2. What are the best retirement withdrawal strategies?
When retirement arrives, you might wonder how much to start withdrawing and which accounts to withdraw from. There are many different guidelines people follow, including the popular 4% rule: Withdraw 4% from retirement accounts during your first year of retirement, then increase your withdrawal each year to adjust for inflation.

But this approach leaves lots of room for interpretation. Which accounts should you withdraw from first? Should you withdraw from multiple accounts at once? What if you encounter an unexpected expense or your cost of living changes?

While strategies like the 4% rule offer a guideline for making your savings last, they shouldn’t be treated as one-size-fits-all solutions. Depending on how much you have saved, your cost of living, and other factors, you may need more or less than 4% each year. A financial advisor can help you assess your withdrawal strategy to ensure you’re able to live comfortably in retirement for decades to come.

3. What are some important tax considerations?
Don’t forget to factor in taxes. You may be past the age of penalties for early retirement withdrawals, but you still have to pay income tax on your distributions from many retirement accounts.

The best withdrawal strategy to minimize taxes depends on your personal situation. Some people withdraw from one account at a time; others plan proportional withdrawals from a combination of different accounts, including accounts that are taxable and others that are tax-deferred, to spread out the tax burden. And if you have any Roth accounts, you won’t pay taxes on those withdrawals.

Since everyone's situation is different, it's best to work with a trusted financial professional for help crafting a withdrawal strategy that minimizes your specific tax burden.

What to Know at Age 73: Required minimum distributions

Some people delay withdrawing from retirement accounts while they continue to work or to allow their investments to keep growing. But at some point, the IRS will require you to pull money from retirement accounts and pay taxes on those savings. Once you reach age 73, many retirement accounts are subject to required minimum distributions (RMDs). If you leave the money in your accounts without taking the minimum distribution, you could face steep penalties.

The rules surrounding RMDs can get complicated. It's always a good idea to work with a financial professional who can evaluate your personal situation and help you determine whether you need to make RMDs and, if so, how much you need to withdraw to avoid penalties.

1. Which accounts are subject to RMDs?
Minimal distributions are required after age 73 from all employer-sponsored retirement plans (such as 401(k)s) and traditional IRAs, among other plans, according to the IRS. RMDs don’t apply to Roth IRAs and designated Roth accounts.

2. What is the deadline for taking my first required withdrawal?
You must receive your first minimum distribution no later than April 1st the year after you turn 73. If you miss that deadline, your account could be subject to a 25% penalty called an excise tax.

3. How much do I need to withdraw to meet the RMD threshold?
The minimum amount is unique to the individual, and it's based on factors, including the number of beneficiaries on the account. In general, RMDs are calculated by dividing the account balance by the estimated life expectancy for the accountholder.

Lean on the pros and map out your withdrawal game plan

You might be used to a set-it-and-forget-it approach to your retirement accounts. Now that retirement is closer, managing your accounts requires active participation. A private banker can help you build a personalized strategy that balances your lifestyle needs, tax considerations and legacy goals.

Are you ready to start the next chapter of your life? Let us help you make the right financial decisions in your retirement. Schedule a consultation with a Fulton Private Banker today.