401k Withdrawal

When you seek a 401k withdrawal, this simply means that you wish to take money out of your 401k account, which is essentially an employer-sponsored retirement account set up between you and your employer. Since it’s set up as a retirement account, early withdrawal from your 401k can’t be done freely. In fact, the IRS imposes a 10% early withdrawal penalty on those employees under the age of 59½. But keep in mind that there are annual limits that you can contribute to your own 401k plan, so you can’t invest every penny of your income into the account.

Main Types of 401k Withdrawal

There are four main types of penalty-free withdrawal allows you to withdraw money without incurring the 10% penalty. This, however, does not mean tax-free; immediately after withdrawing the funds, the money is considered taxable income. The following penalty-free withdrawals can be made:

  • If you have a disability
  • If you are in debt for medical expenses that exceed 7.5% of your adjusted gross income
  • If you are required by court order to give the money to a divorced spouse, child, or dependent
  • If you have experienced a disaster in which you were granted relief by the IRS
  • If you have been terminated, laid off, or quit in the year you turned 55 or later

Required Minimum Distributions

Once you turn 70½, it is required that you begin making 401k withdrawals whether you need it or not. You must receive the required distribution for each year by December 31 of that calendar year. In fact, penalties actually apply for not taking out the required amount each year. In addition, distributions that are taken late are taxed at 50% whereas those taken on time are taxed at a lower rate. Such distributions are calculated based on your life expectancy, so you may in fact receive the entire balance of the 401k while alive. It is up to a plan administrator to determine the minimum amount that must be taken out on an annual basis.

401k Distributions in Retirement

If, however, you are older than 59½, and wish to withdrawal money from your 401k, you can typically take a lump-sum distribution or periodic distributions, on either a monthly or quarterly basis. You can always change the periodic amount at any given time; however, once you turn 70½, you must take out the required annual distribution amount. Some plans may allow you to fund an annuity directly, in which the annuity will pay you a monthly benefit until the day you die. Thereafter, the payments will cease. However, another plan known as the joint-and-survivor annuity will provide that your spouse will continue receiving monthly payments until his/her date of death.

If you need help determining whether or not to withdrawal money from your 401k, or are unsure as to whether or not your withdrawal will incur the 10% penalty imposed by the IRS, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.