How to Draw From Your 401(k)

by Craig Woodman

    When you have worked many years putting money into your 401(k), you may not even think about how to withdraw it. The process is straightforward, particularly if you have reached 59 1/2, the retirement age for a 401(k). If you are younger, there may be other circumstances that allow you to take cash out of your account and not face the tax penalties for early withdrawals.

    At 59 1/2, you can begin taking money from your 401(k) and not face the 10 percent tax penalty for early withdrawals. At this point, you tell your plan administrator you want to begin making withdrawals. The administrator may have a specific form for making the request. With a traditional 401(k) plan, any withdrawals will be taxable at your regular income tax rate.

    If you are laid off or fired from your job at 55 or older, you can access a 401(k) with your former company without penalties. You will need to pay taxes on the withdrawals at your regular income tax rate. You must follow strict rules. If you leave the company at 54, you are not eligible for penalty-free withdrawals until you reach 59 1/2. Also, you cannot draw from a 401(k) account from a previous employer who did not terminate your employment without paying the early withdrawal penalty.

    If you are no longer working for the company, you can roll over your 401(k) balance into an individual retirement account. By doing a trustee-to-trustee transfer, you won't have to pay taxes or penalties because the money is never in your control. You can also request a check from your 401(k) trustee and deposit the money into your IRA. However, the trustee will withhold 20 percent of your withdrawal to cover taxes. In a rollover, if you don't deposit your entire 401(k) balance into your IRA, you will owe taxes and penalties on the shortfall, since it is considered a withdrawal.

    If you have retired and are no longer working, you must begin taking mandatory withdrawals from your 401(k) plan when you turn 70 1/2. These withdrawals are calculated based on your life expectancy according to the Internal Revenue Service. You divide the balance of your 401(k) account by your life expectancy, and that is the amount you must withdraw each year. This money is taxable at your regular income tax rate. If you are still working, you do not have to take mandatory withdrawals from a 401(k).

    At any time, you can take withdrawals from a 401(k) or a traditional IRA account by using IRS Rule 72(t). This rule states you can take equal payments from your 401(k) account each year until you turn 59 1/2 or for five years, whichever is longer. These payments are taxable, but not subject to the 10 percent penalty for early withdrawals. If you elect to take withdrawals based on this rule, your withdrawals must be calculated based on your life expectancy according to the IRS.

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    About the Author

    Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.

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