What are the 401(k) Withdrawal Rules?

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What are the 401(k) Withdrawal Rules?
By: Jaceson Maughan
Life123

Before you decide to withdraw money from your 401(k) retirement plan, there are few 401(k) withdrawal rules you should be aware of. First, you need to remember that 401(k) retirement plans are intended to provide for your retirement, meaning the Internal Revenue Service has specifically instigated withdrawal rules governing 401(k) plans to make it difficult for you to withdraw your retirement money for other purposes. While you may withdraw money from your 401(k) plan after you reach 59 ½, there are a few instances in which you can also withdraw money under the 401(k) withdrawal rules prior to reaching that age.

You can usually withdraw money at any time subject to a substantial penalty. If you withdraw money prior to age 59 ½, 401(k) withdrawal rules dictate that the penalty is 10% of the taxable amount you withdrew. Since the money you pay into a 401(k) plan is untaxed, you will generally be subject to taxes when you withdraw it. 401(k) rules also allow you to withdraw your money when you transfer jobs in order to roll your retirement savings into a new 401(k) account, in which case you won’t need to pay taxes or a penalty.

Some 401(k) plans also allow you to withdraw money from your retirement account prior to age 59 ½ under a hardship withdrawal. There are generally two types of hardship withdrawals. The first type of 401(k) hardship withdrawal is a financial withdrawal, which is subject to taxes and the 10% early withdrawal penalty. Financial hardship withdrawals may be used to purchase a home, stave off foreclosure or eviction, pay college tuition for you or your dependents, pay unreimbursed medical expenses, pay for a funeral or repairs to your home.

The second type of hardship withdrawal allowed under 401(k) rules is a penalty-free withdrawal. While this withdrawal is subject to taxes, there is no penalty. You may make a penalty-free withdrawal if you become disabled, if medical debts and expenses exceed 7.5 percent of your gross income, if a court orders you to pay a sum of money to a former spouse or child, if you are laid off, quit, are fired or retire early and you are over 55 years old or you leave your current job and arrange a plan to withdraw payments equal to what you would have received in income for your normal life expectancy.

Whatever your reason for withdrawal, don’t approach the issue lightly. Your 401(k) is money you have carefully set aside to provide for you when you are likely unable to work any longer. As such you should fully understand the 401(k) withdrawal rules and discuss your plans with your employer’s benefits specialist or a tax specialist.

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