Your 401k – How do you use it? What are the 401k withdrawal rules?

In This Video:

Your 401(k) may be one of your biggest retirement savings tools.  But, how do you use it?  At what age can you take a withdrawal?  What if you wish to take control of your funds instead of leaving it at your employer?  In this video, we cover those subjects along with other 401(k) withdrawal rules.

Things To Consider:

You’ve got a 401(k), you have been making contributions, and your 401(k) is invested.  That’s great, but how do you use the money you’ve worked so hard to save?  While similar to an IRA, 401(k)’s can have their own special withdrawal rules

There are a few age-based rules when it comes to withdrawing from our 401(k):

Age 59.5

After age 59.5 you can make as many withdrawals as you want for whatever you need.  Prior to age 59.5, you might incur a 10% tax penalty.  Just remember, a Traditional 401(k) is a tax-deferred account and all withdrawals are considered taxable income.

Rule of 55

Some employers and plans allow withdrawals from your current 401(k) plan with no penalty if you leave that job in or after the year you turn age 55.  Leaving could mean retirement.  It could mean that you were let go.  This only applies to the 401(k) of the employer you just left.  If you are thinking of utilizing this rule, contact your 401(k) plan sponsor to see if this is part of your plan and if it applies to you.

Age 72

This is the age at which you are required to start taking withdrawals from your 401(k) called Required Minimum Distributions (RMD).  Once you reach age 72, your plan provider should notify you each year of the amount you are required to take out.  If you fail to take your RMD, you are subject to a penalty of 50% of the amount you failed to take out.  There is an exception to this RMD rule.  If you are still working, you can avoid taking your RMD from that employer’s 401(k) as long as you remain employed and if the 401(k) plan allows it.

There are also some non-age-based rules that allow you or others to withdrawal from your 401(k):  If you are totally and permanently disabled.  If you were to experience significant hardships.  If the plan was terminated.  If you were to pass away, your beneficiary may be able to make withdrawals.  All 401(k) plans are different, and therefore it is important to contact your plan sponsor for details specific to your plan.

Last, you may wish to take more control of your 401(k).  While you do have the option to just leave it where it is at, if you are looking to take more control of your funds you can complete a rollover to an IRA.  If done properly, this is a non-taxable event.  This is typically allowed when you leave or retire from the company.  If you are still working, some plans allow you to do this starting at age 59.5.  It is called an “In-Service Withdrawal”.

A few thoughts on why you may wish to consider a rollover to an IRA

  1. Take control of your money
  2. Consolidate all of your qualified plans into 1 IRA
  3. Additional tax-efficient strategies available outside of your 401(k)
  4. Access to more investment options
  5. Potentially lower investment fund fees
  6. Optimize investments to your financial picture and retirement plan

When considering when to withdrawal money from your 401(k), or what to do with it, there are a lot of options.  In our experience, we find many people are wondering how much money they can systematically take out of their 401(k) and then how to invest the money to make it last through their retirement.  While understanding the rules is a good step, putting together a retirement income plan is the next step towards helping answer some of these key questions.