A 401k is an excellent financial tool that allows participants to fund their retirement with pre-tax dollars. However, since the account is designed to be a retirement vehicle, it comes with various rules that regulate when you can withdraw funds from the account.
When You Retire
The first situation when you can withdraw on your 401k is when you retire. When you reach the age of 59 and a half years old, you can begin to withdraw funds from yorur 401k penalty free. Since a 401k withdrawal as taxed as normal income, it would be very wise to wait to withdraw until you retired, or if you are not working. By waiting withdraw, you should be in a lower overall tax bracket, which could save thousands of dollars in income taxes.
Loans From 401k
Another situation when you can withdraw on your 401k is when you get a loan from your 401k. Once you have reached a certain vested point, you may be able to withdraw money from your 401k for a loan. The loan will come with interest, which is paid back to you and deposited into your 401k. If you default on the loan, the unpaid balance will be deemed as income and you will need to pay a penalty on taxes on that amount.
While most withdrawals are voluntary, there is a situation when you are required to withdraw on your 401k. When you reach 70 and a half years of age, you will be required to begin withdrawing funds from your 401k. If you have not withdrawn funds by this date, you will begin to incur taxes and penalties to your account.