You can always withdraw funds from your 401(k) account, but there may be penalties.
Withdrawals Before Age 59 and a Half
Any withdrawal you make from your 401(k) account will be treated as taxable income and subject to taxes in the year you made it, whether before or after retirement. However, you will also be subject to a 10% early withdrawal penalty if you are under age 59 and a half at the time of withdrawing funds.
You can avoid these taxes and penalties by rolling over your 401(k) account assets to another qualified account using a trustee-to-trustee transfer. You might consider taking a 401(k) loan if you wish to access your account assets due to financial hardship.
You can also withdraw funds from your 401(k) account without penalty if you are under age 59 and a half for certain reasons, including:
- If you die and the account balance is withdrawn by your designated beneficiary.
- If you become disabled.
- If your unreimbursed medical expenses exceed 7.5% of your adjusted gross income for the year.
- If you begin substantially equal periodic payments.
- If your withdrawal is a result of a qualified domestic relations order after divorce.
- If you are age 55 or older and are laid off, terminated, or quit your job, also known as the “55 Rule.”
Note: Taxes will still apply to your withdrawals if you take the money for any of these reasons, but at least you will avoid the additional 10% penalty.
Withdrawals After Age 59 and a Half
Age 59 and a half is the magic age when it comes to avoiding penalties associated with early 401(k) withdrawals. You can take penalty-free withdrawals from 401(k) assets that have been rolled into a traditional IRA upon reaching this age. You can also take a penalty-free withdrawal if your money is still in the 401(k) plan and you have retired.
Note: You can take a penalty-free withdrawal if you are still working after reaching age 59 and a half, but the rules change slightly. Check with your plan administrator about the specific rules if you are still employed at the company where you have your 401(k) assets.
Your plan may offer a “while in service” withdrawal option that allows you to access your 401(k) assets without penalty, but not all plans offer this option. And remember, the withdrawal will still be subject to income tax, even if no penalty is imposed.
Withdrawals After Age 72
Many people continue to work past age 59 and a half. They defer their 401(k) withdrawals, allowing the assets to continue growing tax-free, but the IRS requires that you begin taking withdrawals known as “required minimum distributions” (RMDs) by age 72.
Those who own 5% or more of the business can delay taking RMDs while they are still working, but the plan must have made this decision. This only applies to the 401(k) of the current employer. RMDs must still be taken for all other retirement accounts.
Conclusion
Having a strong retirement plan means understanding all the opportunities available to utilize your savings in a way that meets your life goals. It is important to know how and when you can withdraw from your 401(k) account before you fully retire.
Withdrawing funds from your 401(k) account during your working years may also push you into a higher tax bracket, and will reduce the nest egg available to you when you retire.
Frequently Asked Questions
Can I withdraw money from my 401(k) account before I retire without incurring penalties?
No
You must be retired to start withdrawing money from your 401(k) account. If you wait until after you turn 59 and a half, you can withdraw without any penalties, even if you are not retired. If you cannot wait until you are 59 and a half, you will face a 10% penalty on the amount withdrawn.
What should I do with my 401(k) if I leave my job?
If you are over 55 and no longer working, you can start withdrawals from your 401(k) account without incurring penalties. If you are under 55, you may be able to keep your 401(k) with your former employer or transfer it to your new employer’s plan when you start working again. Talk to the plan administrator about your options. Regardless, do not cash out your 401(k) when changing jobs.
How can I withdraw money from my 401(k) account?
To make a withdrawal from your 401(k) account, you will need to either contact your investment plan administrator or log into your account online. You will be able to request a withdrawal and specify a bank account to which the funds should be transferred.
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Sources:
- Internal Revenue Service. “Retirement Topics—Exceptions to Tax on Early Distributions.”
- Internal Revenue Service. “401(k) Resource Guide – Plan Participants – General Distribution Rules.”
- Thrift Savings Plan. “In-Service Withdrawal Basics.”
- Internal Revenue Service. “Retirement Topics — Required Minimum Distributions (RMDs).”
- Internal Revenue Service. “Retirement Topics: Tax on Early Distributions.”
Source: https://www.thebalancemoney.com/can-i-withdraw-money-from-my-401-k-before-i-retire-2894181
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