Can you withdraw money from your 401(k) while you are still employed?
Not everyone should; not everyone can. If you are able to, though, it may mean that you can effectively implement part of your retirement income plan before you retire.
If your 401(k) plan permits it, you can take an in-service withdrawal while working for your current employer and then redirect some of those funds into another investment vehicle that may be more suitable for you – perhaps one constructed to offer an income stream.1
Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
The reasons why you may want to do this.
A non-hardship withdrawal can provide you with early access to a portion of your retirement assets, freeing you to manage them as you wish. You might want to place those assets in other kinds of investments.
A 72(t) strategy could help you avoid an early withdrawal penalty.
Ordinarily, if you are still working and pull money out of your 401(k) before age 59½, you will pay a 10% early withdrawal penalty, plus income taxes, on the money you take out. If you still want or need to retire in your fifties, a properly executed 72(t) strategy may help you.2
Internal Revenue Service Rule 72(t) lets you schedule fixed-income withdrawals (referred to as Separately Equal Periodic Payments, or SEPPs) for a period of five years or until you reach 59½, whichever duration is longer. You may receive fixed, equal payments from your current employer’s retirement plan according to one of three distribution methods that Rule 72(t) defines.2
First things first: make sure you can do this. Talk with your employee benefits or human resources officer at work, and see that the Summary Plan Description (SPD) of your 401(k) permits non-hardship withdrawals. Talk with us to make sure it is an appropriate move for you, given your overall financial plan. If you know you’ll need more retirement income, there can be real merit to reinvesting early withdrawals from a 401(k) in vehicles that generate it.
To speak to a Financial Advisor at the MHV Investment & Retirement Center, simply fill out our appointment request form.
1 - investopedia.com/terms/i/inservicewithdrawal.asp [4/15/19]
2 - wealthpilgrim.com/early-ira-withdrawal-with-no-penalty-72t-rule-explained [5/24/19]
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