A 401k account is a type of savings account offered through an employer, which allows an employee to put away a portion of his or her income each year for retirement. Since the intention of a 401k account is to provide support at retirement, you may not generally withdrawal the money prior to that time, though long term disability is one exception.
Why You Can’t Withdraw
Though you have technically earned the money that you invest into a 401k, once you use it to fund the account, you cannot just withdraw the funds because you need or want the money back. These restrictions are due mainly to the facts that the money is invested pre-tax and that employers often contribute money as well. So, if you want to withdraw these contributions, you must pay the taxes due on the income as well as an early withdrawal fee.
When You Can Withdraw
Like most retirement and savings accounts, a 401k account does have some exceptions under which you can withdraw the funds early without penalty. These exceptions are the potential loss of a primary home or eviction from a rental property, or if you need the money for ordinary living expenses. Long term disability often falls under the living expenses exception, as long as you can prove that you have no other means of financial support.
Since the withdrawal from a 401k for the purpose of long term disability is considered a hardship withdrawal, you do not usually have to pay the early withdrawal penalty, which is 10 percent. You do, however, still have to pay the taxes on a 401k withdrawal, since that income has not yet been taxed. The tax rate for the money withdrawn from the 401k depends upon your adjusted gross income on your tax return.
Declaring the Withdrawal
You do not have to pay the taxes owed on a 401k withdrawal immediately when you take out the money. Instead, you must declare the 401k withdrawal on your tax return in the year in which the money is withdrawn from the account. The amount of money withdrawn from the 401k account is declared as part of your income for that tax year. It is taxed at whatever tax rate you fall under once you figure your adjusted gross income.
- University of Iowa; Traditional or Roth 401k; 2011
- Texas A&M University; Should I Keep Roth IRA Account Open; January 2009
- Internal Revenue Service. "Topic No. 424: 401(k) Plans." Accessed March 10, 2020.
- CARES ACT. "H. R. 748." Accessed April 6, 2020.
- Internal Revenue Service. "401(k) Resource Guide - Plan Participants - General Distribution Rules." Accessed March 10, 2020.
- U.S. Congress. "SECURE Act of 2019, Sec. 113." Accessed March 10, 2020.
Alexis Lawrence is a freelance writer, filmmaker and photographer with extensive experience in digital video, book publishing and graphic design. An avid traveler, Lawrence has visited at least 10 cities on each inhabitable continent. She has attended several universities and holds a Bachelor of Science in English.