In general, financial experts recommend against withdrawing from your 401(k) account unless it’s absolutely necessary. And Clark is definitely against withdrawing money except for in the occasional and extreme scenario.
However, if you’re ready to use that money for retirement funding purposes or if you have a financial emergency that absolutely leaves you no choice, there are some rules that you should know about withdrawing money from a 401(k) account.
Here’s what you need to know before you make that 401(k) withdrawal.
How old do I have to be to withdraw from my 401(k) without penalties?
According to the IRS, the minimum age for withdrawing from your 401(k) account without tax penalties is 59 ½.
If you take out 401(k) funds before that age, you may be subject to a 10% penalty tax on the withdrawn amount.
There are a few exceptions to the age 59 ½ withdrawal rule for 401(k) accounts. Some of those exceptions which allow for non-penalized withdrawals before age 59 ½ can include:
- Withdrawals made due to a separation of service from the company if the separation occurred during or after the year in which the participant turned 55
- Withdrawals made due to a qualifying disability
- Withdrawals made on account of certain disasters for which IRS relief has been granted
- Withdrawals made because of an IRS levy on a plan
Also, if you are in the police, firefighting or paramedic field, you can receive non-penalized distributions from your 401(k) account as early as age 50 provided you have at least 20 years of service in your field.
For more information on withdrawing from your 401(k) without penalty, check out this IRS website page.
How long can I wait before withdrawing from my 401(k)?
The maximum age for beginning 401(k) withdrawals in most instances is 70 ½. However, if you choose not to retire by age 70 ½, you can in some cases refuse withdrawal from your 401(k) until April 1 of the year after your retirement date.
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What is the required minimum 401(k) distribution?
From the IRS website:
A 401(k) plan must provide that you will either:
- Receive your entire interest (benefits) in the plan by the required beginning date (defined below), or
- Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute your entire interest (benefits) over your life expectancy or over the joint life expectancy of you and your designated beneficiary (or over a shorter period).
The required minimum distribution rules apply individually to each plan. Withdrawing from one 401(k) plan will not meet your minimum distribution requirement for another plan.
If you’re interested in learning the detailed minimum distribution requirements for your specific 401(k) plan, talk to your Human Resources 401(k) plan administrator.
Can I convert my Roth IRA or Roth 401(k) into a traditional 401(k) plan?
Roth IRAs and Roth 401(k) plans, unlike traditional IRAs and 401(k) plans, take post-tax money for contribution purposes instead of pre-tax money. What this means in simple terms is that money contributed to a Roth retirement plan cannot be deducted from your taxable income.
However, there’s an upside to the Roth retirement plan, and that is that all profits earned on a Roth retirement plan are earned tax-free, exempt from any future tax payments.
You can roll over your traditional IRA into a qualified retirement 401(k) plan, provided your 401(k) has language allowing it to accept IRA rollovers.
According to the IRS, Roth IRAs can only be rolled over into other Roth IRA plans. However, traditional IRAs can be converted to Roth IRAs. Just remember that there are some tax consequences which could possibly be significant for doing so.
For more information on rollovers and Roth conversions, check out this IRS website page.
Death and disability exceptions for 401(k) accounts
The 10% tax penalty does not apply in cases where a 401(k) is being distributed as a part of an inheritance due to the death of the plan participant, no matter what the age is of the participant at the time of death.
Also, 401(k) withdrawals made because a participant has a qualifying disability will also not be subject to the 10% penalty tax, even if the disabled plan participant is under 59 ½.
The key to what a “qualifying” disability is according to the IRS seems to be that the disability must be serious enough to be considered a cause for permanent retirement. This IRS website page will give you more information on the death and disability exceptions for early 401(k) withdrawal.
Unqualified 401(k) withdrawals
If you don’t meet any of the above qualifications for withdrawing from your 401(k) account before age 59 ½ and you feel you need to make a withdrawal, here’s what you can expect in terms of penalties from the IRS:
- A non-refundable 10% tax penalty
- A 20% tax withholding penalty to compensate for potential taxes due at year end
If your financial situation puts you in a tax bracket that has a lower tax due than 20%, you may be entitled to a tax refund at tax time.
Knowing when it’s okay and when it’s not okay to withdraw money from your 401(k) can be a complicated issue that can result in thousands in tax penalties and fees. This is why it’s doubly important to educate yourself thoroughly on IRS rules before making a 401(k) withdrawal of any kind.