If you have reached the age of 59½ (or 55 or 50, in certain cases), you can cash out your 401(k). But keep in mind that you have to pay taxes on whatever you withdraw. Depending on the size of your account, you could be facing a huge tax bill, especially since those funds may bump you into a higher tax bracket.
Traditional 401(k) withdrawals are taxed at the account owner's current income tax rate. Roth 401(k) withdrawals generally aren't taxable, provided the account was opened at least five years ago and the account owner is age 59½ or older.
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.
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.
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.
Understanding qualified distributions
A qualified distribution is generally one you receive after you reach 59 1/2. You may withdraw as much money from the account as you'd like once you reach this age.
State and local governments may also tax 401(k) distributions. As with the federal government, your distributions are regular income. The tax you pay depends on the income tax rates in your state. If you live in one of the states with no income tax, then you won't need to pay any income tax on your distributions.
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.
Do you pay taxes twice on 401(k) withdrawals? We see this question on occasion and understand why it may seem this way. But, no, you don't pay income tax twice on 401(k) withdrawals. With the 20% withholding on your distribution, you're essentially paying part of your taxes upfront.
The 59 1/2 rule imposes a 10% penalty on early IRA withdrawals. Exceptions to the 59 1/2 rule include first-time home purchases, disability, and higher education expenses. You should consult a specialized financial advisor when considering early withdrawals.
Lump-Sum Benefits
Unless you choose no withholding, a lump-sum benefit that is not an eligible rollover distribution, the taxation is 10% of the distribution.
Generally, your deferred compensation (commonly referred to as elective contributions) isn't subject to income tax withholding at the time of deferral, and you don't report it as wages on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors, because it isn't included in box 1 wages ...
The $1,000 per month rule is designed to help you estimate the amount of savings required to generate a steady monthly income during retirement. According to this rule, for every $240,000 you save, you can withdraw $1,000 per month if you stick to a 5% annual withdrawal rate.
Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
If the distribution is paid to you, you have 60 days from the date you receive it to roll it over. Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later.
Convert to a Roth IRA.
If you have a traditional 401(k), you can convert some or all of it to a Roth IRA. You'll have to pay taxes on the amount converted in the year of the conversion, but qualified withdrawals from a Roth IRA are tax-free in retirement.
The Only Way to Safely Implement the 7% Rule
A GLWB allows you to withdraw up to 7% of your annuity's value annually, ensuring you receive income for life, even if the annuity's balance is exhausted.
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.
Both these retirement savings were created with funds that hadn't been taxed, so tax planning is key. If you make withdrawals after age 59½, the original investment and any earnings will be subject to income tax based on your tax bracket. (A tax professional can help with answers specific to your situation.)
9 States That Don't Tax Any Income at All
Nine states have no state income tax on individual income at all. Eight of them – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – don't tax wages, salaries, dividends, interest or any sort of income.
The income you receive from your 401(k) or other qualified retirement plan doesn't affect the amount of the Social Security retirement benefit you receive each month, but does affect whether your benefits are taxable.
Beneficiaries can avoid taxes on a Roth 401(k) inheritance as long as the account holder began making contributions to the account at least five years before the beneficiary started taking withdrawals. For the 2024 tax year and beyond, RMDs aren't required from designated Roth accounts .
This age marks a turning point of sorts in your life—on a number of fronts. In particular, the Internal Revenue Service (IRS) allows you to make withdrawals from your retirement accounts without incurring a penalty. It has also been nearly a decade since you were granted the right to make “catch-up contributions.”