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When Do I Have To Start Taking Money From My 401K Account?

401k accounts are employer sponsored tax deferred retirement savings plans. The theoretical basis for 401k plans is money is invested tax free while the participant is working. Withdrawals are taxed after the employee retires and moves into a lower tax bracket, reducing their lifetime taxes.

When should I not make 401k withdrawals?

Any withdrawals made before a participant is 55 years old will incur a 10% penalty tax. If a participant withdraws funds from a 401k account of a former employer before the year they reach 59 1/2 years of age, the same 10% penalty applies. Withdrawals done during these time periods should be avoided at all costs. There are exceptions to this rule for financial hardship and first time home purchases. Read the 401k plan document for details.

When Do I Have To Start Taking Money From My 401K Account?

Participant are required to start taking money from their 401k accounts on April 1 of the year they reach 70.5 years of age. The required minimum distribution is based on the IRS uniform life expectancy tables. The only exception to this rule is if the account holder is still an employee of the 401k sponsor and they do not own at least 5% of the company. If the life expectancy tables state a person is expected to live another 18 years, during the first year the required minimum distribution will be 1/18 of the account balance as of January 1 of the year of distribution. The next year will be 1/17 of the January 1 balance, the next year 1/16 of the balance and so forth.

Can I make 401k withdrawals earlier without the 10% penalty?

Yes. As stated earlier, age 55 retirement from the current employer and age 59.5 for former employers. Review the plan document for details.



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