Planning your retirement requires careful consideration of your investment strategy. While your 401(k) or IRA is designed for long-term savings, Wichita residents sometimes face situations where early access to these funds becomes necessary. Here’s what area professionals need to know about early retirement withdrawals.
Early Withdrawal Costs for Kansas Residents
For Wichita business owners and professionals, accessing retirement funds before age 59½ carries significant costs. A $20,000 withdrawal while in the 24 percent federal tax bracket means paying $4,800 in federal taxes plus the 10% penalty ($2,000). Beyond federal implications, Kansas state taxes must also be considered.
Penalty Exceptions
Life Events
New Parents:Â Birth or Adoption Expenses
- Take up to $5,000 per child penalty-free for qualified expenses related to birth or adoption.Â
- This withdrawal can help cover immediate costs of welcoming a new family member.
Medical Needs and Healthcare Expenses
- When unreimbursed medical costs exceed 7.5% of your adjusted gross income, you can withdraw penalty-free up to the amount of excess expenses.Â
- For example, if your AGI is $80,000, you can take penalty-free withdrawals for medical expenses beyond $6,000.
Disability
If you develop a permanent disability that prevents you from working, you can access your retirement funds without penalty. Requirements:
- Physician certification required
- Must demonstrate inability to perform substantial gainful activity
- Condition must be long-term or indefinite
Emergency Situations
- Natural Disasters and Disaster Recovery: Following economic losses in federally declared disaster areas, qualified individuals can withdraw up to $22,000 penalty-free to help rebuild and recover.
Personal Emergencies –Â New for 2024: Emergency Expenses
Take one distribution annually up to $1,000 for personal or family emergencies. Conditions:
- Account balance must remain above $1,000 after withdrawal
- Limited to one withdrawal per calendar year
Domestic Abuse –Â New for 2024: Domestic Abuse Survivor Support
Victims of domestic abuse can withdraw the lesser of:
- $10,000, or
- 50% of their account balance
- This provision helps survivors access funds needed for safety and independence.
Military Service
Active Duty:Â Military reservists called to active duty can take penalty-free distributions if:
- Active duty period exceeds 179 days
- Withdrawals are made during the active-duty period
Important Notes
- While these distributions avoid the 10% early withdrawal penalty, they remain subject to regular income tax
- Documentation requirements vary by exception type
- Consult with a tax professional before making any withdrawal to ensure qualification and proper reporting
SEPP Options for Wichita Business Owners
If none of these exceptions fit your situation, consider Substantially Equal Periodic Payments (SEPP). This option lets you take regular withdrawals based on your life expectancy without penalty – but you must commit to the withdrawal schedule for at least five years or until age 59½, whichever is longer.
Strategic Planning for Professionals
Before making an early withdrawal, consider:
- Available penalty exceptions under current Kansas and federal law
- Total cost including federal, state, and penalty implications
- Lost growth potential in the current market
- Alternative funding sources available in the Wichita metro area
Local Resources for Retirement Planning
Wichita offers numerous resources for retirement planning, including local financial advisors, tax professionals, and retirement specialists familiar with Kansas tax laws and regulations. Consider consulting with a professional (like CGP Group and our trusted partners) who understands both federal regulations and Kansas-specific considerations.
