If you're moving your retirement savings funds to a new plan through a direct rollover to a traditional IRA or a different 401(k), no tax withholding is necessary since the rollover isn't taxable.
If you withdraw the assets from your former employer‑sponsored retirement plan, the check is made payable to you, and taxes are withheld, you may still be able to complete a 60-day rollover. Within 60 days of receiving the distribution check, you must deposit the money into a Rollover IRA to avoid current income taxes.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
You must roll over the check amount and the 20% withheld within 60 days for the distribution to be tax-free. This applies even though you didn't receive the 20%. If you do this, you might get most of the withheld amount back in a tax refund because you won't pay the tax on the withdrawal.
As a general rule, if you withdraw funds before age 59 ½, you'll trigger an IRS tax penalty of 10%. The good news is that there's a way to take your distributions a few years early without incurring this penalty. This is known as the rule of 55.
It's possible to roll 401(k) money into a CD without paying tax penalties but there are some guidelines for doing so. First, you'll need to make sure you're using the right type of CD. Specifically, that means an IRA CD. An IRA CD is a CD account that's funded through an IRA and enjoys its tax benefits.
There isn't a separate 401(k) withdrawal tax. Any money you withdraw from your 401(k) is considered income and will be taxed as such, alongside other sources of taxable income you may receive. As with any taxable income, the rate you pay depends on the amount of total taxable income you receive that year.
The short answer is that yes, you can withdraw money from your 401(k) before age 59 ½. However, early withdrawals often come with hefty penalties and tax consequences.
Roll over your 401(k) to a Roth IRA
You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free. Any additional contributions and earnings can grow tax-free. You are not required to take RMDs. You may have more investment choices than what was available in your former employer's 401(k).
If you withdraw from your 401(k) before you reach age 59½, you may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that you must include in income. The 10% tax will not apply to distributions before age 59½ if you qualify for an exemption.
For most people, rolling over a 401(k) (or a 403(b) for those in the public or nonprofit sector) to an IRA is the best choice. That's because a rollover to an IRA offers: More control over your portfolio and more personalized investment choices. Easier to get up-to-date information about changes.
Borrowing from your 401(k) may be the best option, although it does carry some risk. Alternatively, consider the Rule of 55 as another way to withdraw money from your 401(k) without the tax penalty.
Since Jan. 1, 2024, however, a new IRS rule allows retirement plan owners to withdraw up to $1,000 for unspecified personal or family emergency expenses, penalty-free, if their plan allows.
Key Takeaways. There is usually no transfer fee for rolling over your 401(k) into a new tax-advantaged retirement account. Account fees for your new account might be higher than the ones for your old account.
One of the easiest ways to lower the amount of taxes you have to pay on 401(k) withdrawals is to convert to a Roth IRA or Roth 401(k). Withdrawals from Roth accounts are not taxed. Some methods allow you to save on taxes but also require you to take out more from your 401(k) than you actually need.
In retirement, you can withdraw only as much as you need to live, and allow the rest to remain invested. You can also choose to use your 401(k) funds to purchase an annuity that will pay out guaranteed lifetime income. Internal Revenue Service. “401(k) Resource Guide - Plan Participants - General Distribution Rules.”
If you don't roll over your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax unless you're eligible for one of the exceptions to the 10% additional tax on early distributions.
401(k) Tax Basics
There's no way to take a distribution from a 401(k) without owing income taxes at the rate you're paying the year you take the distribution. Except in special cases, you can't take a distribution from your 401(k) at all until you've reached age 59.5.
The short answer: It depends. If debt causes daily stress, you may consider drastic debt payoff plans. Knowing that early withdrawal from your 401(k) could cost you in extra taxes and fees, it's important to assess your financial situation and run some calculations first.
Cashing Out Your 401k while Still Employed
You could elect to suspend payroll deductions but would lose the pre-tax benefits and any employer matches. In some cases, if your employer allows, you can make an in-service withdrawal if you've reached the age of 59 ½. Such funds can be used to cover a qualifying hardship.
If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run. Early withdrawal penalties can minimize returns.
A rollover doesn't typically trigger tax complications, as long as you move a traditional 401(k) into a traditional IRA or another traditional 401(k) or a Roth 401(k) into a Roth IRA or another Roth 401(k).
Can You Stop Your 401(k) From Losing Money? In a down market, you could transfer all of your holdings to cash or money market funds, which are safe but provide little to no return. (They may not even keep up with inflation.) This, however, is not typically advised unless you are nearing retirement.