Know Your 401K Withdrawal Options

There are a number of different 401k withdrawals options open to those people who invest in 401k plans. Below we will take a look at the options that are available.

1. For those people over the age of 59 1/2 and but under the age of 70 1/2

This withdrawal option allows you to take a lump sum for your account. The provider of your 401k plan will provide a check for what your account is worth less 20%. This is a withholding tax as mandated by the Inland Revenue Services (IRS) and his held will count against your any income tax you need to pay when you file your tax return. Or it may count as a refund if there are any due after your tax return has been filed.

As well as the above option the person can leave their funds where they are with their previous employer but as long as it amounts to no more than $5,000. If it is less than this amount then generally this will be paid to you no matter what your age is. It is important that you check with the plan provider what the regulations are with regard to such small sums of money in a 401k plan.

The other option open to people in this age group is to rollover the funds into a solo 401k plan (but only if you either plan to open one or have your own business). Or you may decide to roll it over into an IRA (Individual Retirement Account) instead.

2. If the person is under the age of 59 1/2.

As with the above option a person is able to take a lump sum from their 401k plan and will be provided with a check less 20% to be withheld for tax purposes. But as well as the 20% being withheld of tax purposes they will also incur a 10% penalty for early withdrawal. Although the 20% withheld is counted towards any tax payments or refunds for that year the 10% penalty fee is not. If the person is lucky they may be in a 401k plan that does not charge a penalty fee for withdrawing funds from it early.

Again as with the options provided for those over the age of 59 1/2 but below 70 1/2 they can if they wish leave their funds with their previous employer. But the amount they leave with them must not be more than $5,000. But as previously mentioned if the funds are less than $5,000 they will be automatically distributed to the person again with the 20% withheld for tax purposes.

The other option as with those of the other age group mentioned to above is to rollover the 401k withdrawals into either an IRA or a solo 401k plan instead.
Wed, Mar 10, 2010 06:18


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