401(k) tax withholding

If your 401(k) withdrawal is eligible to be rolled over to an IRA or other retirement plan but you choose to take it in cash, 20% of the taxable amount of the withdrawal will be withheld and sent to the IRS as a pre-payment of the income tax owed on the withdrawal. This means that you will receive 20% less than the full distribution amount.

Some types of withdrawals, such as those you are required to take (e.g., when you reach age 70½) are not eligible to be rolled over. If a withdrawal is not eligible to be rolled over, it is subject to a lesser rate of withholding and you may elect to waive that withholding.

401(k) early withdrawals

To further discourage use of retirement savings before retirement, the tax laws impose an additional 10% tax on withdrawals made prior to age 59½. The 10% tax applies to the taxable portion of a withdrawal. The early withdrawal tax, sometimes called a penalty, is waived for certain reasons. Some of the reasons the 10% early withdrawal tax will be waived include:

Exceptions to 401(k) early withdrawal penalty:

401(k) hardship withdrawals and loans

Your 401(k) plan may allow you to access your savings while you are still working. The two most common ways to do this are through a hardship withdrawal or a loan.

Hardship

A hardship withdrawal may be taken when the employee or business owner has an urgent financial need. Most plans allow withdrawals for the following types of financial hardships:

A hardship withdrawal may be taken when the employee or business owner has an urgent financial need. Most plans allow withdrawals for the following types of financial hardships:

Loans

Most 401(k) plans allow the business owner and employees to take loans from their 401(k) balances. 401(k) loans are generally paid back to the plan account, with interest, through payroll deductions.

Taking 401(k) distributions in retirement

The 401(k) withdrawal rules require you to begin depleting your 401(k) savings when you reach age 70½.

At this point, you must take a “required minimum distribution” each year until your account is depleted. If you are still working for the employer beyond age 70½, you may be able to delay required minimum distribution until you stop working if your plan allows this delay. The delay option is not available to you if you own 5% or more of the business.

You have until April 1 of the year after you turn 70½ to take your first required minimum distribution. After that, you must take a minimum amount by December 31 each year. Your 401(k) plan administrator will tell you how much you are required to take each year.

The amount is based on your life expectancy and your account balance. If you don’t take your required minimum distribution each year, you will have to pay a tax of 50% of the amount that should have been taken but was not. If you participate in more than one employer plan, you must take a required minimum distribution from each plan.