Though you probably think of your 401(k) as retirement savings, your ability to access the money in your account is tied more to age than to retirement. If you decide to stop working in your forties, you might consider yourself as retired, but you won’t be able to spend the funds in your 401(k) yet. Likewise, if you decide to work until you’re 80, you may not be retired, but 401(k) withdrawal requirements dictate that you must take money out of your account.
In most circumstances, the IRS won't allow you to withdraw the money from your 401(k) without penalty before you reach age 59 ½. If you funded your 401(k) with pre-tax dollars, once you turn 59 ½ you’ll owe ordinary income tax on the money you withdraw from the account, but you won’t have to pay the 10 percent penalty you'd be assessed if you withdrew the money at an earlier age. If you paid taxes on the money you put into your 401(k), you can withdraw the money without taxes or penalty after age 59 ½.
You have to begin taking money out of your 401(k) by the time you reach age 70 ½, whether you’re retired or not. Specifically, according to the IRS, you must begin receiving distributions from your plan “by April 1 of the first year after the year in which you turn 70 ½.” So, if your birthday is June 25 and you turn 70 ½ on December 25, 2012, by April 1, 2013, you must begin withdrawing money from your 401(k). But some 401(k) plans have more stringent requirements. In these plans, you must begin withdrawing money from the plan by April 1 in the year following your retirement, as long as you are older than 59 ½ when you retire.
Some plans allow you to withdraw money from your 401(k) before you reach age 59 ½ in the case of certain hardships. This allows you to access the money in your account to pay medical bills, pay college expenses, buy a first home, avoid eviction or pay for a funeral. The rule is that you can only withdraw funds to meet an “immediate and heavy” financial need, and that you can’t have other funds available, such as savings, to meet this need. While your 401(k) may allow these hardship withdrawals, you’ll have to pay both taxes and the 10 percent penalty when you make them.
Under the provision for Substantially Equal Periodic Payments, or SEPP, you can take distributions from your 401(k) at any age, as long as you withdraw the money in the form of equal payments each year, based on your projected lifespan at the time you begin withdrawals. The IRS publishes life expectancy tables for this purpose. For example, if you retire at age 50, the IRS tables show an anticipated life expectancy of an additional 34.2 years. You divide the funds in your 401(k) by 34.2 and take the results as a distribution each year. You can also choose to figure the distribution adding in interest to reflect the expected growth of the account each year, using formulas provided by the IRS. You must take this distribution amount for at least five years. After five years or when you turn 59 ½, whichever is later, you can change the amount you receive.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.