About 12 million U.S. workers had squirreled away an average of $77,300 in their 401(k) accounts, as of 2012, according to a Fidelity Investments study published by MSN Money. The Internal Revenue Service allows you to stash cash in your 401(k) before paying income taxes on the money, which grows tax-free until you take it out. There is no limit on how many withdrawals you can make. After age 59 1/2, you can take money out without getting hit with the dreaded early withdrawal penalty.
Withdrawals After 59 1/2
To encourage retirement saving, the IRS slaps you with a 10 percent penalty if you siphon money from your 401(k) before reaching 59 1/2, unless you can prove a financial hardship. This is on top of regular income taxes on the withdrawal. While the penalty disappears after 59 1/2, you'll still be liable for the income taxes. If you have a Roth 401(k) account, the contributions are made with after-tax dollars. Roth withdrawals are tax-free, as long as you've had the account open at least five years.
In the year after you reach 70 1/2, withdrawals from your 401(k) are no longer optional. The IRS requires the plan administrator to start paying you regular yearly installments from your account, based on your life expectancy. The idea behind this rule is to distribute the entire balance to you before your death. You may take a larger payout, but your plan's rules may limit how often you can do this.
A 401(k) typically offers an important advantage over an IRA: the contributions made into your account by your employer. This is free money, and a valuable benefit you won't lose even if you change jobs, as long as you have met any vesting requirements for the plan. As of 2013, the IRS yearly limit on 401(k) contributions is $51,000, including the employer match. If you're over 50, you can kick in another $5,500 in "catch-up" contributions.
If you're still working after 59 1/2, you have to follow your plan's rules for withdrawals. Your 401(k) may limit "in-service" payouts you can take while you are still working. You might have to put in more years to be fully vested in the plan, which makes your contributions and your employer's match available for withdrawal. Some plans don't allow withdrawals while you're still working. Your plan will also set the rules on involuntary cash-outs if your employer decides to end the plan.
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