Participants in their employers’ 401k retirement investments should know the 401k withdrawal rules. The rules regarding withdrawals can be broken down into three parts. The first part concerns those withdrawals possibly made before the contributor reaches age 59.5. The second part concerns those withdrawals made after that same age is reached. Finally, there are rules regarding withdrawals at the age of 70.5 and later.
If a participant in a 401k plan wishes to make a withdrawal before reaching the age of 59.5 then there will be a penalty assessed. Ten percent of the amount withdrawn will be taken as an excise tax. Furthermore, the entire withdrawal will be taxed as income at whatever rate the 401k participant presently pays. This is one reason why it is important to know the 401k withdrawal rules.
Prior to turning 59.5 it is possible to take out funds from the 401k account without suffering a penalty. According to 401k withdrawal rules, the withdrawal is treated as a loan. The activity is not penalized, but law stipulates that the loan must be paid back in five years. Interest is charged for the amount withdrawn. However, the money is not considered income and, therefore, is not subject to taxation.
Once the contributor reaches the age of 59.5 then he or she may begin to withdraw funds from the account without suffering any penalty. However, 401k withdrawal rules indicate that the money will now be treated as income. This means they will be taxed by the government.
The contributor is not required to begin withdrawing funds upon reaching the minimum age. Contributions can continue and the deposited funds can be left to continue growing with interest. When the age of 70.5 is reached, though, the 401k withdrawal rules state that the contributor is forced to begin making minimum withdrawals. This minimum is determined according to life expectancy and the amount of money in the account. Failure to abide by this rule is punished with a 50% penalty on the minimum amount expected to be withdrawn.
There are some exceptions to these 401k withdrawal rules. In some cases a contributor can avoid making withdrawals at age 70.5 if he or she is still working. In addition, early withdrawals which are not classed as loans can be made if certain conditions are met. These conditions are set by each employer and may differ from one business to the next. Typically, they involve some sort of hardship experienced by the contributor and may include one of the following: the death of the contributor (in which case the funds are distributed to the heirs), funeral expenses, crippling injury or excessive medical bills. There are some employers who even class college tuition and house purchase or repairs as qualifying hardships.
It should be clear that the 401k withdrawal rules are not exactly cut and dry. When considering a 401k plan and/or making withdrawals from said plan, the contributor ought to consult a tax professional about the specifics of the plan offered by his or her employer. The rules differ somewhat with each employer.
