There are many reasons you may be looking to make a 401k withdrawal; this page will help you to understand all the important surrounding factors and implications of making a withdrawal.
First of all, if you are over 59.5 years old, you can withdraw as much as you want penalty free, but you will of course have to pay tax. Any withdrawal, regardless of age, requires you to pay ordinary income tax on it.
If you are under 59.5 years old, you will have to pay a 10% penalty for an early withdrawal on top of the income tax. Instead you are almost always better off borrowing from 401k accounts instead (see the section further down the page).
Now there are a few exceptions to this rule that would make you exempt from the 10% penalty. If you qualify for any of the following you are exempt:
- You die and the withdrawal is to your heir
- You terminate employment AND are 55 y.o. or older
- You have a medical expense, and you take out less than the maximum allowable amount for a medical expense deduction
- Become disabled
- There is a valid domestic relations order for the withdrawal
- You are on a ‘substantially equal periodic payment’ plan
Other 401k Withdrawal Factors To Consider
When you withdraw from your 401k you lose more than just what you take out. On top of the taxes you pay you also lose the growth that money would have had. Obviously in some cases when you have already reached your retirement goal and are now withdrawing to live on it makes no difference, but if you withdraw early you are missing out on the growth that money would have had.
Alternatives To A 401k Withdrawal
Instead of making a 401k withdrawal, you can borrow from your 401k as mentioned earlier. While there can be drawbacks from getting a loan from your 401k, it’s almost always better than taking an early withdrawal.
Delaying Your 401K Withdrawal
Once you turn 59.5 years old you can start to withdraw money, but you also have the option to keep letting it grow by delaying withdrawing until the April 1st that follows you turning 70.5 years old.
Once you reach 70.5 years old there are minimum required distributions you must make that are based off of your life expectancy. You can calculate your minimum using this RMD calculator.
If you do not withdraw your minimum distribution then you will pay a penalty of 50% of the difference between what you took out (if any) and what the required minimum is.