How to Withdraw Money From Your 401K
There are Several Ways to Withdraw Money from Your 401K
Now that you've saved all that money for retirement, how do you actually withdraw the money from your 401K? It's not all that complicated and we'll try to explain it below.
How to Withdraw Money From Your 401K Plan
First, make yourself familiar with the 401k withdrawal rules. There are really three types; the early 401k withdrawal, a loan withdrawal (which is technically an early withdrawal), and a withdrawal after age 59 1/2. Once you reach 59 1/2, it can be either a voluntary or mandatory. Here we'll cover the three types below.
401k Early Withdrawal
Any withdrawal before you're 59 1/2 will be taxed as ordinary income in the year you withdraw it. Also, you will be charged a 10% early withdrawal penalty. It is always best not to make an early withdrawal but if you are thinking about it, please visit our article on whether or not you should make an early 401k withdrawal. To make an early withdrawal, simply contact your plan administrator or company that manages your 401k.
401k Loan Withdrawal
Depending on your 401k plan, you may have the ability to take a loan from your 401k. The rules and interest rates will be specified in your plan, but typically the loan must be paid back within 5 years, with minimum payments at least every quarter. If you are withdrawing a 401k loan to pay for your primary residence, the loan term can be extended beyond 5 years. However, any loan you get through your employer's plan will typically be due in full if you leave the company, so plan accordingly. And because these loans are not technically a withdrawal, there is no early withdrawal penalty associated with the loan.
Also, it is noteworthy that the interest paid on a 401k loan is paid back into your account. For example, if you borrowed $10,000 and over five years paid back the principal of $10,000 plus $2,000 in interest, your 401k would then have $12,000. However nice that is, remember that if you left your $10,000 investment in investments during that time you would likely have a lot more. In our opinion, 401k loans are risky and should only be used in extreme circumstances. However, it is probably better to take a 401k loan than to use your credit cards or than to withdraw with penalty from your 401k.
To find out if you can get a 401k loan, contact your 401k plan administrator and find out if they allow it and what their loan provisions are.
Withdrawing Money From Your 401k Plan After 59 1/2
When you turn 59 1/2, you can withdraw money from your 401k without paying any penalty. You can withdraw as much or as little as you like until you turn 70 1/2. However, you will be taxed on any withdrawal at your ordinary income rate. So if you are still working and withdraw from your 401k, you will likely have to pay more in taxes than if you wait until you are retired.
You do not have to withdraw money from your 401k until you turn 70 1/2 or you retire, whichever is later. If you have not withdrawn money from your 401k and you hit 70 1/2, you must make minimum withdrawals. To calculate your minimum required distributions (RMDs), fill out the worksheet provided by the IRS.
To actually withdraw the money from your 401k, contact your plan administrator. You can probably do all the transactions directly through their website. At the end of the year they will send you a 1099 tax statement that you will use to file your tax return.
See Also: Other 401k Advice