It is important to know the 401k withdrawal rules and regulations, as this can help you save a lot of money. Start by understanding that a 401k loan and a 401k withdrawal are not the same thing, however. Let's take a look at the different options for the 401k withdrawal rules and regulations.
1. 401k Hardship Withdrawal
If you are younger than 59 1/2, the IRS will charge you an early withdrawal penalty of 10%, in an effort to discourage you from doing so. However, if your employer permits it, you can take a hardship withdrawal for specific expenses like:
– Medical expenses for you or your spouse/dependents
– Purchasing a principal residence, but not mortgage payments
– Educational fees such as tuition and room and board for the next year for you or your spouse/dependents
– Some repair costs to a principal residence
– Funeral expenses
To be allowed to withdraw, you must demonstrate to your employer that you cannot finance these expenses in any other way. You may also self-certify, but this means you have to stop making contributions to your 401k for six months as well.
2. Penalty-Free 401k Withdrawal
There are certain 401k withdrawal rules and regulations that allow you to withdraw early without incurring the 10% penalty. This doesn't mean that it is tax free, however. Usually, this is only allowed for those who:
– Have a qualifying disability
– Have medical expenses, although only for the allowable deduction
– Have to give the money to a child, dependent, or divorced spouse as ordered by the courts
– Have left their employers and have created a withdrawal schedule
3. Required Minimum Distributions
Once you turn 70 1/2, you must start making withdrawals, even if you don't want to. This is because the IRS wants to start receiving your tax contributions. Hence, there are required minimum distributions (RMDs) in place, which start on April 1st of the year in which you turn 70 1/2. After this, you must take the RMD by December 31st every year.
The RMDs are calculated depending on your average life expectancy. In so doing, you should receive the full balance before you die. If you do not take an RMD, or if you take the wrong amount, you will be penalized. You should speak to your plan administrator about what the minimum RMD amount is. Details are also included in IRS Publication 573.
4. Taking 401k Distributions in Retirement
If you are 59 1/2 or older and you want to start withdrawing, you can choose between period distributions and/or lump sum distributions. You will have to pay income tax on lump sum distributions, so be aware of that. Should you want to keep a little nest egg, and that is allowed by the company, then you can opt for monthly or quarterly distributions instead. You can change the exact amount yearly, with some plans allowing for more frequent changes. Do make sure, however, that you manage it properly so that you don't find yourself out of money when you still need some.