How to Draw a Pension Early Without a Penalty

In some circumstances it is possible to draw a pension prior to reaching age 59 1/2 without incurring the usual 10 percent excise tax from the IRS for early withdrawal. However, not all pension plans allow such withdrawals. Many pension plan rules do not allow "in-service distributions," or withdrawals while you are still in service with the company. Some defined benefit pension plans do not allow early distributions at all. Others, such as some 401k plans, allow workers to make withdrawals at any time. However, to avoid the penalty, certain conditions must apply.

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Step 1

Wait until you are age 55 or older prior to retiring or losing your job. True, it's not always up to you. But the IRS does allow displaced or retired workers who are age 55 or older at the time of leaving service to make withdrawal of vested 401k funds without paying a 10 percent penalty tax.

Step 2

Commit to a series of substantially equal periodic payments. This series of payments can be for the rest of your life, or over the joint lifetimes of yourself and your spouse, or anyone else you designate. Section 72(t) of the Internal Revenue Code allows you to annuitize your 401k or other qualified pension plan at any time without paying a penalty to the IRS.

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Step 3

Utilize one of the hardship withdrawal provisions. The IRS allows you to avoid the 10 percent penalty under the following circumstances: death, disability, to pay medical bills, to pay medical insurance premiums, including COBRA premiums, to avoid foreclosure or eviction, to pay for higher education costs, or to make a down payment of up to $10,000 on a house for yourself or a family member.

Step 4

Secure a loan. If your plan rules allow it, you may be able to take a loan against your 401k. You will need to pay yourself back, with interest, over the next five years. If you do not pay back the loan to your own 401k, the IRS will deem the unpaid balance to be a taxable withdrawal, and subject to the 10 percent penalty.

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