September 25, 2018
401(k) early retirement questions come to mind for would-be retirees, especially if they plan on retiring earlier than the average person. However, since the 401(k) is a financial instrument for retirement, many early retirees need to consider how penalties and taxes come into play when withdrawing funds from their 401(k) early. Let’s talk about these considerations, and what methods you can implement to use funds from your assets before the mandated retirement age.
Your Age and 401(k) Early Retirement Withdrawals
Retirement can’t begin soon enough for a lot of us. However, tapping into your account at the wrong time can incur you a 401(k) early withdrawal penalty. Let’s talk about ages to see how much is taxed on 401(k) early withdrawals.
1. Age 55 and Below
At this age range, the government treats early 401(k) withdrawals as taxable income and thus, you incur an income tax. There’s also the 10% early withdrawal penalty. These deductions can cut the value of your withdrawal as much as half.
The only times you’re entitled to tax-free withdrawals in this age range is when you’ve become disabled, make a small deduction for medical expenses, a Qualified Domestic Relations Order (QRDO) is used, or if your beneficiary withdraws from your account if you die.
2. Age 55 to 59 and 6 Months
The same penalties apply, but there are exceptions. When you leave employment at, or after the year you turn 55, 401(k) withdrawals are still taxable income. However, at this point, your withdrawal is free from the penalty charge.
Please note that you will only be able to withdraw from the 401(k) account of your current job. You will need to roll over funds from your other 401(k) accounts from previous jobs to your current one.
3. 401(k) Withdrawal at Age 59 1/2 to 70
The point when you reach 59 and six months is the time you can make withdrawals without penalties from your previous works’ 401(k) assets. If you’re still working, you will need the guidance of your 401(k) administrator to make withdrawals penalty-free. Keep in mind, however, that the government still considers these withdrawals as taxable income.
4. Age 70 and Above
When you’re 70 or older, the IRS mandates that you need to make Required Minimum Distributions (RMDs) or regular withdrawals. However, you can choose to delay these withdrawals until the April of the year you retire. If you have a 5% stake in your company, however, you will be forced to take those tax-deferred withdrawals.
To read the full article, visit Inside Your IRA.