When you retire and are at least 55 years old, or at age 59 regardless of your working status, you may start to take distributions from your 401k retirement account. Until you reach age 70 1/2, you have a number of options including lump sum payments, periodic distributions and rollovers. However, when you reach age 70 1/2, you must start taking minimum required distributions.
When you retire, you can start taking distributions from your 401k plan penalty free, but you will still owe income taxes on the amount of the withdrawal. The withdrawal can be taken as a lump sum distribution or in smaller payments over time. Unless you need all of the money right away, you are usually better off taking smaller distributions to minimize your tax liabilities and to continue to take advantage of the tax-sheltered status of the 401k account.
You can also choose to rollover your 401k plan to a traditional IRA or, if you qualify, a Roth IRA. By rolling the plan over to an IRA, you may be able to take advantage of lower administrative costs and a wider range of investment options. With a 401k, you must choose from the list of investments offered by the company. With an IRA, the only restriction the IRS places on you is that you cannot invest in collectible items. Most people will benefit from a direct rollover, where the money goes straight from your previous 401k account into your new or existing IRA account because of the simplicity of the transfer. If you roll money into a Roth IRA, you will have to include that amount as part of your taxable income for the year, but you will not have to pay taxes when you withdraw the money from the Roth IRA account, nor are Roth IRAs subject to required minimum distributions.
Required Minimum Distributions
Required minimum distributions, or RMDs, are mandatory minimum withdrawals you must take starting at age 70 1/2. The amount you must withdraw depends on the size of your account, your age and your beneficiaries. There are three life expectancy tables: the single life expectancy, which is used only by beneficiaries; the joint and last survivor expectancy, which is only used if your spouse is more than 10 years younger than you; and the uniform lifetime, which is used by everyone else. You divide the number of years found on the life expectancy table by the value of your 401k plan to determine how much must be withdrawn. If you are required to take a distribution and fail to do so, or withdraw less than the required amount, you will owe a 50 percent penalty on the amount not withdrawn.