Larry McClanahan, Financial Advisor
If you're referring to a defined benefit pension, your monthly pension payment would typically be highest if you wait until standard retirement age, which is usually 65. Most pension plans permit you to retire earlier and collect the pension (after a certain number of years employed), but the payout is permanently reduced for your early retirement. Check with HR or your pension administrator for details.
If instead you're referring to a 401(k) or other "qualified" retirement plan (sometimes referred to as "pension"), then retiring early will not affect your vested account balance but it may change the tax impact.
Anything you draw out of the account will be taxable income...both federal and state (if your state has an income tax). There's also a 10% federal penalty tax which is applied in certain situations when you withdraw before age 59.5. Here's how that plays out:
- If this is a 401(k) account, for example, if you terminate employment at age 55 or later where you have the 401(k), then you can withdraw funds as early as 55 without incurring the 10% federal penalty tax.
- If this is a 401(k) account at a previous employer, any funds you withdraw will be subject to the 10% federal penalty tax until you're 59.5
- If you directly roll the retirement account to your IRA, any funds you withdraw will be subject to the 10% federal penalty tax until you're 59.5
- If you roll it (some or all) to an IRA but then implement what's called a "Section 72(t) election," you can withdraw before age 59.5 without the 10% federal penalty tax, but you must follow the payment schedule
I hope that helps.
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