Your 401(k) plan was designed as a means to save money for retirement. As a result, the earliest that you can make penalty-free withdrawals from your 401(k) is at age 59 1/2, when you near retirement. But there are some exceptions that allow you to access your money penalty-free earlier in life. Read on to find out about 401(k) plan withdrawals.
The benefit of a 401(k) plan is the tax savings it offers, which are a result of your tax-deferred contributions. Your deposits into your 401(k) account are made with pre-tax dollars and earn tax-free interest and dividends.
After age 59 1/2, your withdrawals are taxed as regular income — presumably at a lower rate than when you were at the peak of your career.
In general, if you make withdrawals from your 401(k) before you reach 59 1/2, not only will the withdrawal be taxed, but you will pay an additional 10% early distribution penalty tax. Early withdrawals can wreak havoc on your retirement savings.
Fortunately, there are exceptions to this rule. Remember, though, that you should consult your financial or tax advisor before making contributions or withdrawals from your 401(k).
If you have left the company that sponsored your 401(k) plan during or after the year you turn 55, you may begin making penalty-free withdrawals.
In addition, the IRS recognizes that savers sometime require emergency funds. The IRS allows for hardship distributions that do not incur the early distribution penalty described above. Hardship distributions can be withdrawn for situations that present “immediate and heavy financial need,” such as:
The IRS provides a comprehensive list of exceptions here.
There are two important dates for withdrawals from your traditional 401(k): the date when you have penalty-free access to your money — i.e., age 59 1/2 — and the date when you must begin taking distributions from your plan.
Unlike a Roth 401(k), which allows you to keep your money in the plan until you pass away, a traditional 401(k) has required minimum distributions (RMD) that must begin April 1 after the calendar year in which you turn 70 1/2. Even if you are still working, some plans will require you to begin making RMDs.
These withdrawals will be taxed as regular income.
If you need help navigating your finances, including creating a retirement savings strategy and planning for emergencies, Synchrony Bank can help. With a variety of saving tools that put you in control of your money 24/7, Synchrony Bank can help make saving more convenient.
In addition to our award-winning customer service, customers also find that we have no minimum balance or monthly service fee on our high-yield savings accounts. Our accounts are FDIC-insured up to $250,000 per depositor, per insured bank, for each ownership category.
Call Synchrony Bank at 1-844-345-5789 to learn more about managing your retirement accounts today!
The Balance: https://www.thebalance.com/what-you-need-to-know-about-401-k-early-withdrawals-2894147
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