Early Withdrawals

• Early withdrawals are those made prior to you reaching age 59 1/2. These withdrawals normally are subject to a 10 percent penalty in addition to income tax. The tax on the withdrawal amount, along with the penalty, is due in the year you make the withdrawal. You also can make early withdrawals without penalties under section 72(t). Withdrawals made using certain IRS exceptions must be made using IRS actuarial tables. The withdrawals must be equal and substantial and must continue for at least five years or until you reach age 59 1/2, whichever is longer.
  
  

Age 59 1/2 to Age 70 1/2

• Withdrawals made between the age of 59 1/2 and 70 1/2 are unrestricted. You must pay tax on all withdrawals from your traditional 401k plan, but you do not have to withdraw any set amount of money. You may make no withdrawals if you prefer. The money will continue to sit in the 401k plan, and any tax on investment earnings will be deferred until withdrawal.
  
  

After Age 70 1/2

• After age 70 1/2, you must take withdrawals from your retirement account. These withdrawals must be based on IRS actuarial tables in Table III in the appendix of IRS publication 590. If you fail to take the required withdrawal amount, you must pay a 50 percent penalty on the amount of money you should have taken.
  
  

Consideration

• In lieu of taking early withdrawals from your 401k plan prior to retirement, you may take out loans from your 401k if that option is offered by your employer. A 401k plan loan is not subject to any penalties or tax. The loan must be repaid within five years unless it is used to purchase a primary residence. Also, loans must be repaid, regardless of the purpose, if you leave your employer. If the loans are not repaid, they are considered a distribution subject to income tax and early withdrawal penalties.