Making The Numbers Add Up
Put simply, to cash out all or part of a 401 retirement fund without being subject to penalties, you must reach the age of 59½, pass away, become disabled, or undergo some sort of financial hardship . Whatever the circumstance though, if you choose to withdraw funds early, you should prepare yourself for the possibility of funds becoming subject to income tax, and early distributions being subjected to additional fees or penalties. Be aware as well: Any funds in a 401 plan are protected in the event of bankruptcy, and creditors cannot seize them. Once removed, your money will no longer receive these protections, which may expose you to hidden expenses at a later date.
Taking 401 Distributions In Retirement
The 401 withdrawal rules require you to begin depleting your 401 savings when you reach age 72.
At this point, you must take a required minimum distribution each year until your account is depleted. If you are still working for the employer beyond age 72, you may be able to delay required minimum distribution until you stop working if your plan allows this delay. The delay option is not available to you if you own 5% or more of the business.
You have until April 1 of the year after you turn 72 to take your first required minimum distribution. After that, you must take a minimum amount by December 31 each year. Your 401 plan administrator will tell you how much you are required to take each year.
The amount is based on your life expectancy and your account balance. If you dont take your required minimum distribution each year, you will have to pay a tax of 50% of the amount that should have been taken but was not. If you participate in more than one employer plan, you must take a required minimum distribution from each plan.
Withdrawing Funds Between Ages 55 And 59
Most 401 plans allow for penalty-free withdrawals starting at age 55. You must have left your job no earlier than the year in which you turn age 55 to use this option. You must leave your funds in the 401 plan after leaving your job in order to access them penalty-free, but there are a few exceptions to this rule. This option makes funds accessible as early as age 50 for many police officers, firefighters, and EMTs.
Make sure you understand the rules around the age requirement for penalty-free withdrawals. The age 55 rule won’t apply if you retire in the year before you reach age 55, and your withdrawal would be subject to a 10% early withdrawal penalty tax in this case.
The age-55-and-up retirement rule won’t apply if you roll your 401 plan over to an IRA. The earliest age to withdraw funds from a traditional IRA account without a penalty tax is 59½.
Don’t Miss: What Year Did 401k Start
If You Are Under 59 1/2
Making a withdrawal from your Fidelity 401k prior to age 60 should always be a last resort. Not only will you pay tax penalties in many cases, but youre also robbing yourself of the tremendous benefits of compound interest. This is why its so important to maintain an emergency fund to cover any short-term money needs without costing yourself extra by making a 401k early withdrawal.
However, life has a way of throwing you curveballs that might leave you with few to no other options. If you really are in a financial emergency, you can make a withdrawal in essentially the same way as a normal withdrawal. The form is filled out differently, but you can find it on Fidelitys website and request a single check or multiple scheduled payments.
If you jump the gun, though, and start making withdrawals prior to the age of 59 1/2, youve essentially broken your pact with the government to invest that money toward retirement. As such, youll pay tax penalties that can greatly reduce your nest egg before it gets to you. A 401k early withdrawal means a tax penalty of 10 percent on your withdrawal, which is on top of the normal income tax assessed on the money. If youre already earning a normal salary, your early withdrawal could easily push you into a higher tax bracket and still come with that additional penalty, making it a very pricey withdrawal.
Know: The Best Roth IRA Accounts
How To Withdraw Money From A 401 After Retirement
Shawn Plummer
CEO, The Annuity Expert
When you retire, one of the first things youll want to do is figure out how to access your 401 funds. This can be a little confusing, as there are several ways to go about it. This guide will walk you through the process of withdrawing money from your 401 after retirement. We will also answer some common questions, such as do you pay tax on 401 when you retire? and how do you not run out of 401 money. So read on for all the information you need to make the best decisions for your retirement!
Read Also: Where To Transfer My 401k
What You Need To Know To Avoid Costly Mistakes
Andy Smith is a Certified Financial Planner , licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career.
In an ideal world, everybody would leave their 401 funds alone until they need the money for retirement. That might mean rolling your account over to an Individual Retirement Account , but it also means not cashing out the funds prior to reaching retirement age, to allow the money to grow to its maximum potential amount. In investing, time truly is your best asset. At some point though, you will begin taking distributions, and heres what you need to know.
The best way to take money out of your 401 plan depends on three things:
The Costs Of Early 401k Withdrawals
Early withdrawals from an IRA or 401k account can be expensive.
Generally, if you take a distribution from an IRA or 401k before age 59 ½, you will likely owe:
- federal income tax
- 10% penalty on the amount that you withdraw
- relevant state income tax
Calculate It:401k Withdrawals Before Retirement
The 401k can be a boon to your retirement plan. It gives you flexibility to change jobs without losing your savings. But that all starts to fall apart if you use it like a bank account in the years preceding retirement. Your best bet is usually to consciously avoid tapping any retirement money until youve at least reached the age of 59 ½.
If youre not sure you should take a withdrawal, use this calculator to determine how much other people your age have saved.
Read Also: Is An Annuity Better Than A 401k
Do You Pay Tax On 401 When Retire
When you retire, you will have to pay taxes on any money you withdraw from your 401. The amount of tax you pay will depend on your tax bracket. Withdrawals from a 401 are considered taxable income. So if you are in the 25% tax bracket, you will owe 25% in taxes on the withdrawal. There may also be penalties for early withdrawal if youre under the age of 59.5, so it is essential to wait until you are eligible to make a withdrawal without penalty.
Borrowing From A 401 Should Be A Last Resort
Economists recommend tapping a 401 as a last resort. Why?
- A 10% penalty applies if the money is withdrawn early for any reason aside from an approved hardship.
- Consumers have to pull out a larger percentage of assets, as they are worth less during a downturn.
- There will be no compounding during the withdrawal period
- The amounts saved during the first 10 years of investing can account for 50% of the balance by age 65.
- Income taxes will still be owed on withdrawals from traditional 401 deferrals and employer matching.
The ideal scenario would be to tap emergency cash savings. Americans are advised to keep at least three to six months of expenses in a cash savings account for emergencies. Homeowners may consider taking a low-interest line of credit. Personal loans from a local credit union can help consolidate debt or make a big purchase, though the interest rate can be 10% or higher.
Weve only just skimmed the surface of the questions you may face here. Call us for more personalized financial advice about starting, changing, or updating your 401 plan. Ubiquity specializes in working with small businesses.
You May Like: Can A Spouse Get Your 401k In Divorce
Using Your 401 Funds To Buy A Home Has Pros And Cons
Marcus Reeves is a writer, publisher, and journalist whose business and pop culture writings have appeared in several prominent publications, including The New York Times, The Washington Post, Rolling Stone, and the San Francisco Chronicle. He is an adjunct instructor of writing at New York University.
If you need cash for a down payment for a home, and you have a 401 retirement plan, you might be wondering if you can use these funds.
Typically when you withdraw funds from a 401 before age 59½, you incur a 10% penalty. You can use your 401 toward buying a house and avoid this fee. However, a 401 withdrawal for a home purchase may not be best for some buyers because of the opportunity cost.
Learn how to tap your 401 to buy a home and more about some alternatives for funding a home purchase, such as using a mortgage program or saving up cash.
Withdrawing From 401k Plan At/after 595 Years
Have you checked into an age 59.5 withdrawal?
Generally speaking, a 401k plan must allow a participant age 59.5 and older to take withdrawals from their account even if the person is still working.
So, if you need money from your 401k plan, there is no better time than being 59.5 to take a withdrawal if you need it. Since, according to the IRS, you are standard retirement age, you can take this withdrawal without fear of paying the dreaded 10% early withdrawal penalty.
Of course, be careful not to drain your account too soon, or you could be in trouble down the road when you really are retired.
If you dont need the money, but you do want a little more flexibility within your retirement vehicle, this is a great opportunity for you to roll money over into an IRA. Since a 59.5 withdrawal is eligible to be rolled over, you can take all or a portion of your 401k assets and place them into an IRA even if you are still employed.
One word of warning, however. Always be mindful of the investments you hold in your 401k plan. Just because you can take a good portion of your money out and roll it to an IRA, doesnt necessarily mean that you should. If your account has suffered some recent losses due to poor market activity, it may not be a good time to transfer assets, since you will quite likely have to sell your investments to transfer the funds , and will be selling at a loss.
You May Like: How Much Should I Have In My 401k At 55
Requesting A Loan From Your 401
If you do not meet the criteria for a hardship distribution, you may still be able to borrow from your 401 before retirement, if your employer allows it. The specific terms of these loans vary among plans. However, the IRS provides some basic guidelines for loans that won’t trigger the additional 10% tax on early distributions.
Whether you can take a hardship withdrawal or a loan from your 401 is not actually up to the IRS, but to your employerthe plan sponsorand the plan administrator the plan provisions they’ve established must allow these actions and set terms for them.
For example, a loan from your traditional or Roth 401 cannot exceed the lesser of 50% of your vested account balance or $50,000. Although you may take multiple loans at different times, the $50,000 limit applies to the combined total of all outstanding loan balances.
What Is A Withdrawal Buckets Strategy
With the buckets strategy, you withdraw assets from three buckets, or separate types of accounts holding your assets.
Under this strategy, the first bucket holds some percentage of your savings in cash: often three-to-five years of living expenses. The second holds mostly fixed income securities. The third bucket contains your remaining investments in equities. As you use the cash from the first bucket, you replenish it with earnings from the second and third buckets.
Potential advantages: This approach allows your savings to continue to grow over time. Through constant review of your funding, you also benefit from a sense of control over your assets.
Potential disadvantages: This approach is more time-consuming.
Also Check: How To Find My 401k Contributions
Recommended Reading: Can I Rollover 401k To Ira While Still Employed
Substantially Equal Periodic Payments
Substantially equal periodic payments are another option for withdrawing funds without paying the early distribution penalty if the funds are in an IRA rather than a company-sponsored 401 account.
SEPP withdrawals are not permitted under a qualified retirement plan if you are still working for your employer. However, if the funds are coming from an IRA, you may start SEPP withdrawals at any time.
SEPP withdrawals are not the best idea if your financial need is short term. When starting SEPP payments, you must continue for a minimum of five years or until you reach age 59½, whichever comes later. Otherwise, the 10% early penalty still applies, and you will owe interest on the deferred penalties from prior tax years.
There is an exception to this rule for taxpayers who die or become permanently disabled.
SEPP must be calculated using one of three methods approved by the IRS: fixed amortization, fixed annuitization, or required minimum distribution . Each method will calculate different withdrawal amounts, so choose the one that is best for your financial needs.
Our Take: When Can You Withdraw From Your 401k Or Ira Penalty
There are a number of ways you can withdraw from your 401k or IRA penalty-free. Still, we recommend not touching your retirement savings until you are actually retired. Compounding is a huge help when it comes to maximizing your retirement savings and extending the life of your portfolio. You lose out on that when you take early distributions. To see how much compounding can affect your 401k account balance, check out our article on the average 401k balance by age.
We understand that its always possible for unforeseen circumstances to arise before you reach retirement. Being aware of the exceptions allows you to make informed decisions and possibly avoid paying extra fees and taxes.
To take control of your finances, a good place to start is by stepping back, getting organized, and looking at your money holistically. Personal Capitals free financial dashboard will allow you to:
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
You May Like: How To Cash Out My 401k
Don’t Miss: What Is A Good Percentage To Put In Your 401k
It Can Be Done But Do It Only As A Last Resort
Kirsten Rohrs Schmitt is an accomplished professional editor, writer, proofreader, and fact-checker. She has expertise in finance, investing, real estate, and world history. Throughout her career, she has written and edited content for numerous consumer magazines and websites, crafted resumes and social media content for business owners, and created collateral for academia and nonprofits. Kirsten is also the founder and director of Your Best Edit find her on LinkedIn and Facebook.
If your employer allows it, its possible to get money out of a 401 plan before age 59½. Taking that route is not always advisable, though, as early withdrawals deplete retirement savings permanently and, minus a few exceptions, carry a 10% penalty and a substantial income tax bill.
If you have no better alternatives and decide to proceed, youll need to get in touch with your human resources department. Theyll give you some paperwork to fill out and then ask you to provide some documentation. Once thats done, you should eventually receive a check with the requested funds.
Withdrawals After Age 59
Tax-advantaged retirement accounts, such as 401s, exist to ensure that you have enough income when you get old, finish working, and no longer receive a regular salary. From time to time, you may be eager to tap into your funds before you retire. However, if you succumb to those temptations, you will likely have to pay a hefty priceincluding early withdrawal penalties and taxes such as federal income tax, a 10% penalty on the amount that you withdraw, and relevant state income tax.
Most Americans retire in their mid-60s. Theres a little more flexibility offered with retirement savings plans, though, including the company-sponsored 401. The Internal Revenue Service allows you to begin taking distributions from your 401 without a 10% early withdrawal penalty as soon as you are 59½ years old.
If you retireor lose your jobwhen you are age 55 but not yet 59½, you can avoid the 10% early withdrawal penalty for taking money out of your 401. However, this only applies to the 401 from the employer that you just left. Money that is still in an earlier employers plan is not eligible for this exceptionnor is money in an IRA.
You May Like: Does My 401k Transfer From Job To Job
