- How to Claim Hardship for Cashing Out My 401(k)
- Do I Have to Pay a Penalty on My 401(k) for Hardship Withdrawal?
- Can I Withdraw Funds Without Penalty if I Roll 401(k) Funds Into a Roth IRA?
- How to File Taxes on a 401(k) Early Withdrawal
- Can I Borrow From My 401(k) If I Am Already Retired?
- How to Use a 401(k) to Pay Off an IRS Levy Without a Penalty
Usually, it's best to wait until you're 59 1/2 years old so you can take qualified distributions from your 401(k) plan. However, if you're not working, taking out money from your 401(k) plan might be your least damaging option, despite the taxes and penalties. Knowing the rules ahead of time allows you to better plan for your potential withdrawal.
You can withdraw money from your 401(k) plan only under certain circumstances, which include after you've left your job. You have to have actually terminated your employment with the company rather than just taking a vacation or a temporary leave of absence. For example, if you take two months of maternity leave, you can't take money out of your 401(k) plan. However, if you're laid off but the company says they hope to rehire some workers in a few months, you can.
Taxes on Withdrawals
When you take a distribution from your 401(k) plan, you usually have to include all of it in your taxable income for the year because all of your contributions were excluded from your taxable income. However, if you're taking the money out of a Roth 401(k) plan, you prorate your distributions between the nontaxable contribution portion and the taxable earnings portion. For example, if your Roth 401(k) plan has 30 percent earnings and 70 percent contributions, 70 percent of your distribution is tax-free.
The taxable portion of your 401(k) plan distribution is subject to an additional 10 percent tax penalty if you're not at least 59 1/2 years old when you take the distribution. For example, if you take a taxable $10,000 early distribution from your traditional 401(k) plan while out of work, you'll pay a $1,000 tax penalty on top of any income taxes. If you take a $10,000 early distribution from a Roth 401(k) plan but only $3,000 is taxable, you'll pay a $300 early withdrawal penalty.
The IRS does not offer an early withdrawal penalty exception for distributions due to losing your job. However, if you meet the requirements for another exception, you don't have to pay the 10 percent penalty. Exceptions include if you've retired after your 55th birthday, suffered a permanent disability or are taking the distribution pursuant to a qualified domestic relations order, or QDRO.
- tax forms image by Chad McDermott from Fotolia.com