401(k) plans are retirement savings accounts that allow individuals to save money for their future. Withdrawals from 401(k) accounts are generally subject to a 10% penalty if made before age 59½. However, there are some exceptions to this rule. For example, individuals who are over age 55 and have left their job can withdraw money from their 401(k) account without paying a penalty. Additionally, individuals who are disabled or have certain medical expenses can also withdraw money from their 401(k) account without paying a penalty.
Age 59 1/2 Rule
Under the age 59 1/2 rule, you can withdraw money from your 401(k) without paying the 10% early withdrawal penalty if you are age 59 1/2 or older.
- This rule applies to traditional and Roth 401(k) plans.
- You can take withdrawals in any amount, as long as you do not exceed the annual contribution limit.
- You do not have to start taking withdrawals at age 59 1/2.
If you withdraw money from your 401(k) before age 59 1/2, you will have to pay the 10% early withdrawal penalty in addition to any income taxes that you owe.
| Age | Can Withdraw Without Penalty |
|---|---|
| Under 59 1/2 | No |
| 59 1/2 or older | Yes |
Hardship Withdrawals
Hardship withdrawals are allowed from 401(k) plans in certain situations, such as:
- Medical expenses
- Educational expenses
- To purchase a primary residence
- To prevent eviction or foreclosure
- Funeral expenses
- Certain expenses related to natural disasters
Hardship withdrawals are subject to income tax and a 10% early withdrawal penalty (unless the participant is over age 59½). However, some plans may allow for the suspension of loan payments in the event of a hardship.
| Hardship Withdrawal Reason | Tax Treatment | Early Withdrawal Penalty |
|---|---|---|
| Medical expenses | Subject to income tax | 10% |
| Educational expenses | Subject to income tax | 10% |
| Purchase of a primary residence | Subject to income tax | 10% |
| Prevent eviction or foreclosure | Subject to income tax | 10% |
| Funeral expenses | Subject to income tax | 10% |
| Natural disasters | Subject to income tax | 10% |
Qualified Distributions
A “qualified distribution” is a distribution that is taken on or after the participant’s required beginning date (RBD) and that is not a “disqualified distribution.”
- Roth 401(k) conversions are not considered “qualified distributions.”
- Substantially even and extended period payments are generally considered “qualified distributions,” provided they were set up before the participant was 70 $$\frac 12$$.
| Age 70 1/2 or later | Before age 70 1/2 | |
|---|---|---|
| Required minimum distribution | 10% additional tax | |
| Qualified distribution | No | No |
| Nonqualified distribution | 10% | Yes |
Avoid using the following terms: loan, hardship distribution, or required distribution
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