A 401k is a qualified retirement plan offered by many employers. Here, your contributions are deducted from your annual salary and put into your chosen investments. You may choose either a traditional or a Roth 401k. Aside from helping you grow your nest egg, this retirement plan also has beneficial tax advantages.
Because of this, understanding the rules on how to withdraw from 401k is crucial. Here’s what you need to know:
This is the penalty-free withdrawal you can do once you reach the age of 59 ½. Tax deductions on qualified distributions depend on whether you have a traditional or a Roth 401k plan.
Since Roth 401ks allow after-tax contributions, you may take money out tax-free. But, this is also considering you’ve had the account for at least five years. On the contrary, since traditional 401k contributions are taken from gross income, withdrawals are taxed.
Required Minimum Distributions
When you reach the age of 72, yearly withdrawals from your 401k become mandatory. This required minimum distribution is determined by your life expectancy and the amount of money you have in your account. Here, withdrawing above the minimum distribution amount is possible.
Withdrawing from your 401k before the required age is also possible. But, this comes with a 10% penalty on top of the income tax already deducted from your contributions. Despite that, some circumstances, such as being permanently disabled, allow penalty-free withdrawals.
Another way you can take money out from your 401k early without penalties is through hardship withdrawals. Still, some plans don’t allow this, so you should also check with your employer.
To qualify for a hardship withdrawal, you must have a heavy and immediate financial need. Also, the amount you’re allowed to take out should only cover the necessary cost of meeting these needs. Here are some situations that may trigger hardship withdrawals:
- Urgent medical expenses
- Family circumstances that require funds for divorce or funeral
- Costs related to purchasing a home or repairing a damaged home
- Expenses to prevent eviction or closure of a primary home
Contact LoneStar Wealth Management Today
Learning the ins and outs of how to withdraw from 401k helps you plan a financially stable retirement. If you’re unfamiliar with what to do, consult a trusted financial advisor. Reach out to our agents at LoneStar Wealth Management in Lubbock, TX for more information about our financial services.