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By Cameron Huddleston

You have been diligently saving for retirement for years. Finally, the time has come to start tapping your accounts. You want your money. Now what?

If you don’t know the ins and outs of withdrawing money from your IRA, 401(k) or similar plan, you’re not alone. “A lot of people don’t know their options at retirement,” says Clare Bergquist, director of 401(k) strategies at Charles Schwab.

When you retire, you should receive from your employer a notice that explains how you can collect your benefits from the company’s retirement plan. But this document can be difficult to follow. So here’s what you need to know — in simple terms — with the benefits and drawbacks of each option explained.

When you can access your money

The general rule is that you must be 59½ to tap your 401(k), 403(b) or IRA without paying a 10% early withdrawal penalty. However, there are exceptions

72(t) payments. Named after a section of the tax code, these payments offer a way to avoid the 10% penalty. You must take substantially equal distributions based on your life expectancy for at least five years or until you are 59½ — whichever is longer. The calculators at can help you calculate your payments.

You’ll have to pay the 10% penalty retroactive to your first withdrawal, plus interest, if you deviate from your payout schedule.

Early retirement. You can take penalty-free withdrawals from a 401(k) if you are at least age 55 in the year you retire and if you leave your money in your former employer’s plan. (If you roll the money into an IRA, however, the 59½ age rule kicks back in.) However, not all employers allow this option. You also can access 403(b) money penalty-free if you retire at 55.

457s. You can withdraw your money from this plan without penalty after you leave your job — no matter how old you are.

What you can do with your account

You have several options for handling the money your company retirement plan when you retire. You can:

Leave your money in your employer’s plan. Departing employees with accounts worth more than $5,000 can leave their money in their 401(k) plan. The benefits include continued access to investment advice, if your employer offers it for 401(k) participants, Bergquist says. If your company’s plan offers good investment choices, you might want to stick with it, especially if you would have to pay much higher fees for those same investments outside your 401(k).

And many company-sponsored plans will allow you to take a loan (you can’t do so with an IRA). You can borrow the lesser of $50,000 or 50% of the vested balance. If you’re 701/2 and still working, you don’t have to take minimum distributions until you actually retire. The exception doesn’t apply to 5% owners in a company.

However, there are drawbacks to leaving your money in your former employer’s plan, says Rick Meigs, president of Employers aren’t as good about communicating with ex-employees, so you have to make sure you don’t lose track of your 401(k) and your employer doesn’t lose track of you. Another negative: You can’t continue to contribute to your employer-sponsored 401(k) once you leave the company.

Roll over into an IRA. The primary benefit of transferring your 401(k) to an IRA is greater control over your money. You can invest in the stocks, bonds or mutual funds of your picking – not just the limited choices in your 401(k). And, as long as you still have earned income, you can continue to contribute up to $6,000 a year to an IRA if you’re 50 or older.

Just make sure you tell your employer to transfer your 401(k) assets directly to the IRA custodian. Otherwise, your company will withhold 20% for taxes if it sends the money to you. Then you’ll have 60 days to move the entire 401(k) balance — even the 20% you didn’t receive – into an IRA. (Any part of the distribution not rolled over on time will be taxed in your top bracket and, if you’re under than 55, hit with a 10% penalty.)

The drawback is that you must start taking mandatory withdrawals — even if you’re still working — by April 1 of the year after you turn 70½. You will have to pay a penalty of 50% of the amount you failed to withdraw if you don’t take a required distribution each year.

Roll over into a Roth IRA. You now can roll over your 410(k) directly into a Roth IRA, without going through a traditional IRA first. The catch: Your income has to be less than $100,000 (married or single). But even that restriction disappears in 2010.

The benefits are huge: No taxes on withdrawals after you are 59½ and the account has been open for at least five years and no mandatory distributions.

Take a lump sum. You can cash out your company retirement account entirely, but you will have to pay taxes at your regular income-tax rate on the entire amount — not just earnings. Plus, the big influx of income could force you to pay the alternative minimum tax, Meigs warns. Never take a lump sum without going over it with tax expert, he says.

How the tax bill is handled

Unless you have contributed to a Roth IRA, Roth 401(k) or made after-tax contributions to a traditional 401(k) or IRA, you will have to pay taxes on your withdrawals. The question is how? Are taxes withheld when you tap the account?

Joint effort for a 401(k). Employers must withhold 20% of the amount you withdraw. Consider that a down payment, Meigs says. You will receive a Form 1099-R that shows how much you withdrew during the year and that 20% that already was withheld for Uncle Sam.

You’ll have to cover the rest of the federal tax bill, as well as any state and local taxes, on your own. All 401(k) distributions — not just earnings — are taxed as ordinary income. Most likely, you’ll need to make estimated tax payments so you won’t get hit with a big tax bill in April (and a penalty for underpayment of taxes).

The IRA administrator can handle it. Cash coming out of an IRA is taxable in your top tax bracket, except to the extent that it represents a return of nondeductible contributions. Unless you indicate otherwise, the IRA administrator (brokerage, mutual fund company or bank) will withhold federal taxes, and sometimes state, taxes whenever you take money our of your account. You will receive a Form 1099-R showing the amount withdrawn and taxes withheld.