3 Things to Know about 401(k) Distributions

An estimated 79% of Americans have access to a 401(k) plan as part of their employee benefits package and are able to save and invest in a tax efficient way for retirement. If you’re one of the 79%, let’s fast forward a few years to when you’re ready to retire. How do you get your money out of the plan? A recent article by The Motley Fool talks about 3 important things to know when it’s time to start withdrawing 401(k) funds, which are commonly referred to as taking distributions.

A 401(k) distribution is taking money out of the plan and not planning to repay it. Once the money is distributed from the plan the entire amount withdrawn (the pretax contributions, employer match, and any gains you made over the years) becomes taxable unless you roll it over. Depending on when you take a distribution you may incur different withdrawal penalties. To avoid the penalties and keep as much of your money as you can, remember these three numbers:

59.5: This is the age that you can begin withdrawing your funds from the plan without a 10% penalty.  If you leave a job before age 59.5, you should try to leave your 401(k) where it is (it still belongs to you, don’t worry), roll it over to a new 401(k), or into an Individual Retirement Account (IRA). If you take it as cash instead, that’s a distribution to you and you’ll have to pay taxes and the 10% penalty on it.

55: An exception to the 59.5 rule is if you’re at least 55 years old (or age 50 for public safety employees) at the time you leave a job, you’re allowed to take a distribution from that company’s plan without a penalty.

70.5: This is the age that the IRS requires you to start withdrawing your money. You’ve postponed paying taxes on those pre-tax contributions for several years and now the IRS wants their share. You have to begin taking RMDs (Required Minimum Distributions) by April 1 of the year after you turn 70.5 to avoid a penalty and you can’t roll them over to another plan or IRA. The amount you have to withdraw each year is based on your account balance and life expectancy. An exception to this rule is if you’re still working at age 70.5 (and you don’t own 5% of the company), you can postpone the RMD for this company’s plan until you do leave. 

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