Employer-sponsored 401(k) plans allow employees to save a portion of their salary for tax-advantaged retirement investments. Many companies match a percentage of the employee's contribution and add it to the 401(k) account.

But you may incur a penalty if you take money out before retirement. Generally speaking, you may withdraw funds from your retirement savings account anytime, but if you do so before you reach age 59½, you may face an additional penalty of 10% on top of other taxes.

According to 401(k) withdrawal rules, penalty-free withdrawals (called qualified distributions) are allowed once you reach age 59½. You can also take qualified distributions earlier for certain life events, such as medical expenses. And, after age 72 or 73, depending on the year you were born, you must take required minimum distributions (RMDs) from either a 401(k) or an individual retirement account (IRA).

He꧟re’s a look at the 401(k) withdrawal rules an⛦d how you can avoid the 10% early withdrawal penalty.

401(k) Withdrawals Before Age 59½

Tax-advantaged retirement accounts, such as 澳洲幸运5官方开奖结果体彩网:401(k)s, exist to ensure that you have enough income when you get ol🅺d, finis🌞h working, and no longer receive a regular salary.

From time to time, you may be eager to tap into your funds before you retire; however, if you succumb to those temptations, you will likely have to pay a hefty price. This can include 澳洲幸运5官方开奖结果体彩网:early withdrawal penalties and taxes: federal and state income taxes and a 10% penalty on the amount that you withdraw.

Most Americans retire in their mid-60s, and the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) allows you to begin taking distributions from your 401(k) without a 10% early withdrawal penalty as soon as you are 59½ years old. But you ♏still have to pay taxes on your wit𝓀hdrawals.

401(k) Penalty-Free Early Distributions

You may be able to withdraw from your 401(k) without incurring the 10% early distribution penalty in the following circumstances:

• You choose to receive a series of substantially equal payments from your account
• You retire, lose your job, or leave to take a new job when you are 55 or older (or 50 if you are a public safety employee, including federal law enforcement officers, corrections officers, and air traffic controllers, among others); this only applies to the 401(k) from the employer you just left
• A court’s qualified domestic relations order requires that you cash out a 401(k) to split it with your ex-spouse
• You’re a domestic abuse survivor (you can withdraw up to $10,000 or 50% of the account, whichever is less)
• You give birth or adopt a child ($5,000 per child for qualified birth or adoption expenses)
• You have a personal or family emergency for which you can take an emergency distribution of up to $1,000 in a calendar year
• You are terminally ill
• You are or become disabled
• You rolled over the account to another retirement plan within 60 days (called a 60-day rollover)
• You are deceased and payments were made to your beneficiary or estate after your death
• The money was used to pay an IRS levy
• You have experienced economic loss due to a federally declared disaster
• You are a qualified first-time homebuyer (no more than $10,000)
• You have unreimbursed medical expenses that are greater than 7.5% of your adjusted gross income (AGI)
• You’re a qualified military reservist called to active duty
• You were automatically enrolled in a 401(k) and you want to get out (within specified time limits), or you made corrective distributions for excess contributions

It’s wise to consul♋t with a tax advisor if you have any questions about whether any withdrawals you make from your 401(k) will involve a penalty as well as taxes.

401(k) Hardship Withdrawals

Under certain circumstances, the IRS allows for𓂃 what are known as hardship distributions for “an immediate and heavy financial need.” The distribution can only be for the amount required to satisfy that ✅particular financial need, and it must be in compliance with your 401(k) plan terms.

Here are the life events that generally qualify for a hardship withdrawal and that may not be subject to the 10% penalty:

• Medical bills for you, your spouse, or your dependents
• Costs directly related to the purchase of your home (excluding mortgage payments)
• College tuition, related fees, and room and board for the next 12 months for you, your spouse, or your dependents
• Money to avoid eviction or foreclosure on your primary residence
• Funeral expenses for you, your spouse, or your children or dependents
• Certain expenses to repair damage to your home

To qualify for a hardship withdrawal, you must show your plan administrator that you were unable to obtain the needed funds from another source. The distributions are subject to income tax (unless they are Roth contributions; see “Taxes on 401(k) Distributions,” below), and they cannot be repaid into the plan or rolled over into another plan or IRA.

How to Take 401(k) Withdrawals

Depending on your company’s rules, when you retire, you may elect to take regular distributions in the form of an annuity, either for a fixed period or over your anticipated lifetime, or ta𝔍ke nonperiodic o🎉r lump-sum withdrawals.

When you take withdrawals from your 401(k), the remainder of your account balance continues to be invested according to existing 澳洲幸运5官方开奖结果体彩网:allocations. This means that the length of time over which withdrawals can be taken and the amount of each withdrawal depend on the performance of your investment 澳洲幸运5官方开奖结果体彩网:portfolio.

Taxes on 401(k) Distributions

If you take 澳洲幸运5官方开奖结果体彩网:qualified distributions from a traditional 401(k), all distributions are subject to ordinary 澳洲幸运5官方开奖结果体彩网:income tax. Contributions were deposited from your paycheck before being taxed, deferring the taxation process until the withdrawal date. In other words, when you eventually tap into your 401(k) funds, distributions are 澳洲幸运5官方开奖结果体彩网:treated as taxable earning✅s for that year, on top of any other money that you make.

On the other hand, if you have a 澳洲幸运5官方开奖结果体彩网:designated Roth account within a 401(k) plan, you have already paid income taxes on your contributions, so withdrawals are not subject to taxation. Roth accounts allow earnings to be distributed tax free as well, as long as the account holder is over age 59½ and has held the account for at least five years.

Keeping Your Money in a 401(k)

Depending on your age, you are not required to take distributions from your account as soon as you retire. While you cannot continue to contribute to a 401(k) held by your former employer, your plan administrator is required to maintain your plan if you have more than $5,000 invested. Anything less than $5,000 will likely trigger a 澳洲幸运5官方开奖结果体彩网:lump-sum distribution.

If you do not need your savings immediately after retirement, then let them continue to earn 澳洲幸运5官方开奖结果体彩网:investment income in the 401(k). As long as your money remains in your 401(k)💖, it is not subject to any taxation.

Required Minimum Distributions

While you don’t need to start taking distributions from your 401(k) the minute you stop working, you must begin taking required minimum distributions (RMDs) when you turn 73, if you were born in 1951 to 1959, and 75 if you were born in 1960 or later. The age for RMDs had been 72 until Congress passed SECURE 2.0 in December 2022.

If you wait until you are required to take your RMDs, then you must begin withdrawing regular, periodic distributions calculated based on your 澳洲幸运5官方开奖结果体彩网:life expectancy and account balance. While you may withdraw more in any given year, you 澳洲幸运5官方开奖结果体彩网:cannot withdraw less than your RMD.

Converting a 401(k) to an IRA

You cannot contribute to a 401(k) after you leave your job. So, if you want to continue adding money to your tax-advantaged retirement savings, you’ll need to roll over your account(s) into an IRA.

Previously, you could contribute to a Roth IRA indefinitely but could not contribute to a 澳洲幸运5官方开奖结果体彩网:traditional IRA after age 70½; however, the Setting Every Community Up for Retirement Enhancement (SEC൩URE) Act changed the law so you can now contribute to a traditional IRA for as long as you like, provided you have earned money.

Keep in mind that you can only contribute 澳洲幸运5官方开奖结果体彩网:earned income, not gross income, to either type of IRA. So this strategy will only work if you have not retired completely and still earn “taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment,” as the IRS puts it. You can’t contribute money from either investments or your 澳洲幸运5官方开奖结果体彩网:Social Security check, though certain types of 澳洲幸运5官方开奖结果体彩网:alimony payments may qualify.

How to Roll Over Funds

To execute a 澳洲幸运5官方开奖结果体彩网:rollover of your 401(k), you can ask your 澳洲幸运5官方开奖结果体彩网:plan administrator to distribute your savings directly to a new or existing IRA. Alternatively, you can elect to take the distribution yourself; however, in this case, you must deposit the funds into your IRA within 60 days to avoid paying taxes on the income.

Traditional 401(k) accounts can be rolled over into either a traditional IRA or a Roth IRA, whereas designated Roth 401(k) accounts must be rolled over into a Roth IRA.

Traditional IRA and Roth IRA Withdrawals

Like traditional 401(k) distributions, 澳洲幸运5官方开奖结果体彩网:withdrawals from a traditional IRA are subject to your normal income tax rate in the year when you take the distribution.

Withdrawals from Roth IRAs, on the other hand, are entirely tax free if the🅷y are taken after you reach age 59½ (or see out a five-year holding period, whichever💃 is later).

However, if you decide to roll over the assets in a traditional 401(k) to a Roth IRA, you will owe income tax on the full amount of the rollover. That’s because with Roth IRAs, you pay taxes upfront (and you haven’t yet paid taxes on contributions made to your 401(k)).

Traditional IRAs are subject to the same RMD regulations as 401(k)s and other employer-sponsored retirement plans; however, there is no RMD requirement for a Roth IRA.

The Bottom Line

澳洲幸ꦕ运5官方开奖结果体彩网:Rules controlling 401(k) withdrawal🅘s and what you can do with your 401(k) after retirement are very complicated, and shaped by both the IRS and the company that set up the plan. Consult your company’s plan administrator for details. It may also be a good idea to talk to a 澳洲幸运5官方开奖结果体彩网:financial advisor before making any final decisions about your retirement accoun🥃t.