401k withdrawals are classified as either qualified or unqualified. Because of the retirement savings nature of a 401k account, to encourage only retirement withdrawals, IRS has set a nominal retirement age, namely 59 and half, at and after which withdrawals are deemed qualified without limitations. Early withdrawals, except for a few exceptions that are considered as qualified within special circumstances as stated in the IRS rules, are unqualified and must be first approved under a set of conditions, mostly known as hardship withdrawals, are for prescribed uses, and will all incur a 10% excess-tax penalty, in addition to paying the normal income tax on any pre-tax contributions. Withdrawals on after-tax contributions, such as from a Roth 401k are tax free. While the general rule as to "when should I start withdrawing money from my 401k" is to wait until you are 59 and half to avoid any penalty, in some other special situations, you should also start withdrawing money from your 401k.
Qualified Early Withdrawal
If you have encountered any of the following special circumstances, you should and can start withdrawing money from your 401k without being assessed any penalty.
1. unpaid medical expense that is qualified for tax-deductible
2. being totally and permanently disabled
3. have a domestic relations court order demanding 401k withdrawals for divorced spouse, a child, or a dependent
4. 55 years old or over and is retired
5. was retired as of March 1, 1986 and still is, having elected to start receiving substantial equal periodic distributions of 401(k) balance, which must last at least 5 years or until 59 and half, whichever is longer.
Early Hardship Withdrawal
You may start withdrawing money from your 401k if you fall into some of the following situations and have no other financial resources. But remember that a 10% penalty is assessed on any hardship withdrawal.
1. you have an immediate and severe financial need
2. no other financial resources are available
3. any other 401k withdrawals have been first obtained
And funds withdrawn must be for following uses:
1. medical expense in excess tax-deductible amount
2. primary home purchase
3. payments to prevent eviction or foreclosure
4. higher education cost
5. funeral expenses for a family member
Mandatory Withdrawal and the Time When You Should Definitely Start Withdrawing Money from Your 401k
There is a minimum distribution requirement regarding withdrawing money from 401k as prescribed by IRS rules. The April following the year when you turn to 70 and half or you retire, whichever happens first, is the time when you should and must start withdrawing money from your 401k. There is a 50% penalty, the most severe penalty IRS has ever imposed, on funds that should have been withdrawn, when you fail to make the mandatory minimum distribution.