401k Withdrawal Rules - General Distributions

401k Withdrawal Rules

401k Withdrawal Rules - Plan Sponsors -
General Distribution Rules

A 401k plan provides workers with an tool for building wealth for their retirement. It also can provide a much needed nest egg for emergencies such as a large medical bill, job loss or other life events such as the death of a spouse or a divorce.

401k Withdrawal Rules - Strict 401k Withdrawal Limits

Because these funds are meant to be retirement savings, there are very strict 401k withdrawal limits set by employers and the IRS that explicitly spell out how much you can take out of your plan and under what circumstances you are allowed to make a withdrawal.

The truth is that you should avoid withdrawing funds from your 401k plan if possible. The government discourages early withdrawals from 401k plans, any withdrawal made before age 59 1/2 — by tacking tax penalties on to the withdrawals. This is why, if at all possible, you should take out a loan at a reasonable interest rate or dial back your expenses before taking money out of your 401k plan.

401k Withdrawal Rules - Employers set Limits

Employers set 401k withdrawal limits based on IRS guidelines. In general, workers under the age of 59 1/2 may withdraw money from their 401k plans only if they or a family member has large medical bills, to make a down payment on a house, to prevent foreclosure on their homes or to pay for college for a child or a spouse.

Workers making 401k withdrawals under these circumstances will not be allowed to make any 401k contributions back to their plan for six months. These withdrawals are subject to taxation as ordinary income and will also face an additional 10 percent penalty tax. This means that if you withdraw $20,000 from your plan, you’d pay taxes on it as if it were an extra $20,000 of income and you’d also pay 10 percent for the penalty.

401k Withdrawal Rules - Exceptions

There are some exceptions to the 10% penalty for early withdrawal, however. These exceptions include withdrawals from the plan by the employee’s family if he or she dies, withdrawals based on the total and permanent disability of the employee, resignation, termination or retirement from work after the employee has reached age 55 or a qualified domestic relations order or approved medical expenses.

401k Withdrawal Rules - Options

A more attractive option to directly withdrawing funds from your 401k plan may be to take a loan from the plan. Under 401k plan loan rules, you may borrow money from your 401k plan and avoid paying tax on it as additional income and dodge the 10% penalty if you agree to repay the loan at a reasonable rate of interest over 5 years.

The aforementioned 401k withdrawal limits and rules are those set by the federal government. Individual employers may enforce stricter rules about how much you can withdraw, under what circumstances you can withdraw and whether you can borrow from your plan.

401k Withdrawal Rules

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