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The 401(k) withdrawal is the process of removing funds from an existing 401k plan. While intended to function as a retirement plan, an early withdrawal from an existing plan may take place for several reasons, including changing employers or opting for an early retirement. Depending on the age of the recipient, there are various options associated with a 401(k) withdrawal.
For people who opt for a 401(k) withdrawal prior to reaching the age of 59 ½, there is the option of withdrawing the entire balance of the fund in one lump sum. When this option is selected, the administrator of the fund will withhold a percentage of the balance in order to pay applicable taxes. There is normally an additional percentage withheld as a penalty for withdrawing the funds as a cash withdrawal before reaching retirement. While the percentage withheld for taxes will be counted against the income tax due for the period, the penalty is not counted toward any taxes due.
People between the ages of 59 ½ and 70 ½ also have the option of withdrawing the balance of the account in a lump sum. There is still the withholding for taxes, but unless there are highly unusual circumstances, no penalty fee is imposed. As with anyone who conducts a 401(k) withdrawal before reaching the age of 59 ½, persons in this age bracket can also count the amount withheld for taxes toward any taxes due for the period.
For anyone who is over the age of 70 ½, taxes are deducted from the amount of the 401(k) withdrawal, but there is no penalty accessed. Like the other two age groups, the amount withheld for taxes can be counted toward the total tax debt for the current period.
People of all ages have a couple of other options with a 401(k) withdrawal. One is to leave existing retirement plans in place with the previous employer. Keep in mind there is usually a minimum amount that must be in the fund in order to do this. If a required minimum distribution takes place with a 401k left with a previous employer, up to half the withdrawal amount may be withheld for taxes.
A final option with a 401(k) withdrawal is simply transferring the balance of the fund from the existing plan to a new plan, such as enrolling in the 401k plan offered by a new employer or opting to create an Individual Retirement Account or IRA. However, it should be noted that it is usually necessary to take the required minimum distribution of the choice is to move the money out of a 401(k) plan and into an IRA.
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