How to Withdraw from Your 401K
Understand 401(k) withdrawal after age 59.5., Consult a financial adviser to answer any questions., Contact your plan administrator to set up a lump sum distribution withdrawal, purchase an annuity, or rollover your 401(k)., Consider setting up a...
Step-by-Step Guide
-
Step 1: Understand 401(k) withdrawal after age 59.5.
At the age of
59.5, you are to considered to have reached the minimum distribution age, and can therefore begin withdrawal from your 401(k) without being subject to a 10% penalty on early distributions.
Withdrawals will be taxed at your current income rate, due to the fact that your contributions were tax-deferred.Tax deferral is when a taxpayer delays payment of taxes to a future period.
In theory, net taxes paid should be the same.
However, taxes paid after retirement are typically at a lower rate than when working, thus, the tax savings.
Taxes can sometimes be deferred indefinitely.
There are multiple options for withdrawal available once you reach
59.5, and what option you choose will depend on your goals and overall financial situation.
Before electing an option, it is always wise to sit down with an adviser.
Most companies offering 401(k) plans have knowledgeable advisers who understand the complexity of 401(k) plans, the choices available to plan participants, and the consequences of each choice.
Alternatively, you can seek outside help from an accountant or financial planner to further your understanding and provide more diverse options. -
Step 2: Consult a financial adviser to answer any questions.
Consulting a financial adviser from the 401(k) account is a critical step.
The intricacies of your retirement account will usually be quite complicated and difficult to negotiate yourself, and therefore expert guidance is often required. , Any withdrawal activity will begin with a discussion with your plan administrator.
While your employer sponsors the plan, the plan is usually managed by a third-party financial institution, and the plan administrator serves as a connection between you and your plan.
If you know who they are, contact them to discuss options for creating a lump sum distribution withdrawal, purchasing an annuity, or rolling over your 401 (k), and they can guide you as to next steps.
Ask your employer who your plan administrator is if you are unsure. , The lump sum distribution is typical form of payout for a 401(k).
It refers to a payout you can take as taxable income.
Plans generally offer a variety of distribution amounts at the option of the account holder, including taking the entire sum at once.
Options often include a periodic dollar amount, or a fixed percentage of the account on a regular basis.
Note that total withdrawal and payment of taxes rarely makes financial sense for most people unless your tax bracket or lump sum is low.
For example, you might choose to take $2,000 monthly, $10,000 quarterly, or 1% of the account balance each quarter.
Typically, most plans allow you to select a particular amount to receive every couple weeks, months, or quarters.
You're also allowed to tweak the plan periodically throughout the year.
Be sure to communicate with an adviser before opting for a particular distribution amount and schedule.
For specific situations, such as separation from employer or separation from employer with an outstanding loan, click here for recommended cash distributions. , Buying annuities is a means of receiving an income for the rest of your life, without having to worry about how the source of the income is invested.
You can also assign these accounts to your spouse in the event of your death.
Annuities allow you to essentially exchange your 401(k) for a guaranteed income for life, which can be effective for individuals who are worried about exhausting their savings.
It can also be useful for individuals who are looking to avoid the hassles and worry of investing.
Be aware there are risks associated with this option, including what can be fairly significant fees.
Be sure to consult an adviser before proceeding, as they can inform you as to what your various options are and how to proceed. , An IRA is an account at a financial institution that allows you to save for retirement with tax-free growth or on a tax-deferred basis.A rollover into an IRA refers to the process of moving assets from your 401(k) into a traditional IRA, where you make fiscal contributions that you deducted on your tax return and where any earnings can potentially grow tax-deferred until you withdraw them in retirement.This option can allow greater flexibility and control over investments, and is recommended by many advisers.
Within an IRA, you are free to invest money as you see fit.To rollover money into an IRA, simply contact the the company that holds your 401(k) plan or your plan administrator, and ask for the money to rolled over into an IRA of your choosing.
They will guide you through the process.
Typically you will need to setup an IRA beforehand, and you can do so through most financial institutions.
The major providers of IRA's are current Vanguard, Fidelity, and T.Rowe Price.Many retirees find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
An IRA also allows you greater access to a wider range of investment.Rollovers can be direct
- moving from one plan to the other
- or indirect when the 401(k) plan administrators sends you the funds directly.
If that occurs, you have a single 60 day period to open the new IRA account and avoid income tax; otherwise, income tax on the entire distributed amount will be due.
Since investment in traditional IRA's is tax-deductible (and therefore pre-tax income is contributed), if your 401(k) contributions are also pre-tax, the rollover is fairly simple.
Upon withdrawal from the IRA, however, taxes will be owed on the withdrawn sums.Money in a 401(k) cannot be touched in the event of personal bankruptcy or lawsuits, meaning that it's protected from your creditors.
Unfortunately, this is not true of IRAs, which are more vulnerable: $1 million is exempted and may be more at discretion of bankruptcy court.
If you have more than one retirement account, it's sometimes recommended that you consolidate into an IRA, which is easier to manage and gives you chances to qualify for discounts in mutual funds. , With a Roth IRA, you make contributions with money you’ve already paid taxes on (after-tax) and your money may potentially grow tax-free, with tax-free withdrawals in retirement.This option can also give you a wider range of potential investment opportunities than a 401(k).
Talk to your financial advisor if you are unsure whether to use a Roth IRA.
First, verify that your current 401(k) plan allows for rollovers to Roth IRA’s.
Choose a Roth IRA plan that works best for you and open an account.
Note that 401(k) transfers of tax-deferred money will trigger tax if Rolled into Roth IRA.
Seek tax help.
Get required forms from new and old providers.
If possible, choose “direct rollover” as an option, so that money goes from 1 account to another without your manual involvement.
Deposit checks immediately to avoid delays and confusions.
See more detailed instructions here. , Doing nothing with your 401(k) once you reach
59.5 years of age is also a viable option.
Providing you are not retiring and are continuing to work, you can continue investing pre-tax funds into your 401(k) and allowing the principle to grow tax-free, just as you did up until that point.
You are not required to take minimum distributions from a 401(k) until you are
70.5 years old.
If you are planning continuing contributions to your 401(k) for a period after
59.5, it is wise to consult with your adviser at work to discuss options for re-configuring your investments as to reduce risk and preserve capital as move closer to retirement. -
Step 3: Contact your plan administrator to set up a lump sum distribution withdrawal
-
Step 4: purchase an annuity
-
Step 5: or rollover your 401(k).
-
Step 6: Consider setting up a lump-sum distribution.
-
Step 7: Consider buying an annuity.
-
Step 8: Consider rolling money into a traditional IRA.
-
Step 9: Consider rolling money into a Roth IRA.
-
Step 10: Consider doing nothing.
Detailed Guide
At the age of
59.5, you are to considered to have reached the minimum distribution age, and can therefore begin withdrawal from your 401(k) without being subject to a 10% penalty on early distributions.
Withdrawals will be taxed at your current income rate, due to the fact that your contributions were tax-deferred.Tax deferral is when a taxpayer delays payment of taxes to a future period.
In theory, net taxes paid should be the same.
However, taxes paid after retirement are typically at a lower rate than when working, thus, the tax savings.
Taxes can sometimes be deferred indefinitely.
There are multiple options for withdrawal available once you reach
59.5, and what option you choose will depend on your goals and overall financial situation.
Before electing an option, it is always wise to sit down with an adviser.
Most companies offering 401(k) plans have knowledgeable advisers who understand the complexity of 401(k) plans, the choices available to plan participants, and the consequences of each choice.
Alternatively, you can seek outside help from an accountant or financial planner to further your understanding and provide more diverse options.
Consulting a financial adviser from the 401(k) account is a critical step.
The intricacies of your retirement account will usually be quite complicated and difficult to negotiate yourself, and therefore expert guidance is often required. , Any withdrawal activity will begin with a discussion with your plan administrator.
While your employer sponsors the plan, the plan is usually managed by a third-party financial institution, and the plan administrator serves as a connection between you and your plan.
If you know who they are, contact them to discuss options for creating a lump sum distribution withdrawal, purchasing an annuity, or rolling over your 401 (k), and they can guide you as to next steps.
Ask your employer who your plan administrator is if you are unsure. , The lump sum distribution is typical form of payout for a 401(k).
It refers to a payout you can take as taxable income.
Plans generally offer a variety of distribution amounts at the option of the account holder, including taking the entire sum at once.
Options often include a periodic dollar amount, or a fixed percentage of the account on a regular basis.
Note that total withdrawal and payment of taxes rarely makes financial sense for most people unless your tax bracket or lump sum is low.
For example, you might choose to take $2,000 monthly, $10,000 quarterly, or 1% of the account balance each quarter.
Typically, most plans allow you to select a particular amount to receive every couple weeks, months, or quarters.
You're also allowed to tweak the plan periodically throughout the year.
Be sure to communicate with an adviser before opting for a particular distribution amount and schedule.
For specific situations, such as separation from employer or separation from employer with an outstanding loan, click here for recommended cash distributions. , Buying annuities is a means of receiving an income for the rest of your life, without having to worry about how the source of the income is invested.
You can also assign these accounts to your spouse in the event of your death.
Annuities allow you to essentially exchange your 401(k) for a guaranteed income for life, which can be effective for individuals who are worried about exhausting their savings.
It can also be useful for individuals who are looking to avoid the hassles and worry of investing.
Be aware there are risks associated with this option, including what can be fairly significant fees.
Be sure to consult an adviser before proceeding, as they can inform you as to what your various options are and how to proceed. , An IRA is an account at a financial institution that allows you to save for retirement with tax-free growth or on a tax-deferred basis.A rollover into an IRA refers to the process of moving assets from your 401(k) into a traditional IRA, where you make fiscal contributions that you deducted on your tax return and where any earnings can potentially grow tax-deferred until you withdraw them in retirement.This option can allow greater flexibility and control over investments, and is recommended by many advisers.
Within an IRA, you are free to invest money as you see fit.To rollover money into an IRA, simply contact the the company that holds your 401(k) plan or your plan administrator, and ask for the money to rolled over into an IRA of your choosing.
They will guide you through the process.
Typically you will need to setup an IRA beforehand, and you can do so through most financial institutions.
The major providers of IRA's are current Vanguard, Fidelity, and T.Rowe Price.Many retirees find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
An IRA also allows you greater access to a wider range of investment.Rollovers can be direct
- moving from one plan to the other
- or indirect when the 401(k) plan administrators sends you the funds directly.
If that occurs, you have a single 60 day period to open the new IRA account and avoid income tax; otherwise, income tax on the entire distributed amount will be due.
Since investment in traditional IRA's is tax-deductible (and therefore pre-tax income is contributed), if your 401(k) contributions are also pre-tax, the rollover is fairly simple.
Upon withdrawal from the IRA, however, taxes will be owed on the withdrawn sums.Money in a 401(k) cannot be touched in the event of personal bankruptcy or lawsuits, meaning that it's protected from your creditors.
Unfortunately, this is not true of IRAs, which are more vulnerable: $1 million is exempted and may be more at discretion of bankruptcy court.
If you have more than one retirement account, it's sometimes recommended that you consolidate into an IRA, which is easier to manage and gives you chances to qualify for discounts in mutual funds. , With a Roth IRA, you make contributions with money you’ve already paid taxes on (after-tax) and your money may potentially grow tax-free, with tax-free withdrawals in retirement.This option can also give you a wider range of potential investment opportunities than a 401(k).
Talk to your financial advisor if you are unsure whether to use a Roth IRA.
First, verify that your current 401(k) plan allows for rollovers to Roth IRA’s.
Choose a Roth IRA plan that works best for you and open an account.
Note that 401(k) transfers of tax-deferred money will trigger tax if Rolled into Roth IRA.
Seek tax help.
Get required forms from new and old providers.
If possible, choose “direct rollover” as an option, so that money goes from 1 account to another without your manual involvement.
Deposit checks immediately to avoid delays and confusions.
See more detailed instructions here. , Doing nothing with your 401(k) once you reach
59.5 years of age is also a viable option.
Providing you are not retiring and are continuing to work, you can continue investing pre-tax funds into your 401(k) and allowing the principle to grow tax-free, just as you did up until that point.
You are not required to take minimum distributions from a 401(k) until you are
70.5 years old.
If you are planning continuing contributions to your 401(k) for a period after
59.5, it is wise to consult with your adviser at work to discuss options for re-configuring your investments as to reduce risk and preserve capital as move closer to retirement.
About the Author
Harold Roberts
Harold Roberts has dedicated 1 years to mastering marketing strategies. As a content creator, Harold focuses on providing actionable tips and step-by-step guides.
Rate This Guide
How helpful was this guide? Click to rate: