401K Withdrawal Rules
Withdrawal Rules for Your 401k Retirement Savings
If you are under 59 ½ years of age and are not totally disabled there will probably be a penalty of 10 percent of any amount that you withdraw from your IRA account, although there are some exceptions to this rule.
If you are totally disabled you can withdraw all or any portion of the money from your 401K without suffering the 10 percent early withdrawal penalty.
There is no penalty for the withdrawal of funds from a 401K account if the plan participant has died.
If you arrange for periodic payments to be made out of a qualified retirement plan after you have left the service of the employer overseeing your 401K, then you may also avoid early withdrawal penalties.
If your medical bills exceed 7.5 percent of your adjusted gross income (AGI) then you may be entitled to make penalty-free withdrawals from your 401K prior to age 59 ½.
You may also be eligible to withdraw up to $10,000 penalty-free (although taxable) from your 401K if the money is used to purchase a home.
If you have less than $5,000 in your 401K account and you leave you job for any reason, including being laid off, you generally have no choice but to withdraw all of your funds whether that entails taking the 10 percent early withdrawal penalty or not.
Solo 401K Accounts
If you run your own business with no full-time employees other than a spouse, it may be possible for you to borrow up to $50,000 against the money in your Self-Employed 401K penalty-free and tax free provided that the loan is repaid on time.
Additionally, while you are required to pay interest on the money you borrow from yourself, the interest rate is the same as the prime rate and all interest that you are required to pay is paid to yourself, not to any bank or other lender.
Withdrawing From a 401K if You Are Aged 59 ½ to 70 ½
If you are between the ages of 59 ½ and 70 ½ you may withdraw funds from your 401K account penalty-free, although 20 percent of your funds will be withheld for taxes. If you end up owing less than the 20 percent withheld on your taxes, the remainder will be refunded to you.
Withdrawing From a 401K After age 70 ½
Starting at age 70 ½ you will be required to make at least a yearly withdrawal from your 401K account. The amount you are required to withdraw changes from year to year based on current life expectancy calculations and based in part on the size of your account. Plan on being required to withdraw approximately 1/28th of your account each year.
While there is no penalty for withdrawals after age 70 ½, you are required to pay tax on any money you take out of your account. Your account provider is required by law to withhold 10 percent of any funds that are withdrawn. When you file your taxes this 10 percent can be applied toward any tax you owe or will be refunded to you if you do not owe taxes that year.
Talk With A 401K Plan Provider For More Details
Your 401K is an important part of your retirement planning and should not be left up to chance. It is recommended that you consult with someone knowledgeable about setting up 401K accounts since the rules governing these accounts are subject to change at any time.
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