a) Can I (one time) withdraw money at no penalty from 401k? b) If 'no,' can I start min withdrawals? c) If I start withdrawals, can I stop as long as I am working?
You have some good questions that I think many participants in qualified plans including 401(k) plans can benefit from hearing the answers.
Regardless of what kind of qualified plan one may be in, the age 70.5 required distribution rules are the same. That is, if you are over 70.5 and do not own more than 5% of the company sponsoring the plan, you are in, you do not have to take a Required Minimum Distribution ("RMD") from the plan until the April 1st of the calendar year after you terminate employment regardless of how old you become. However, if you are over 70.5 and you own more than 5% of the company, you must take your first RMD no later than the year after you reach age 70.5, even if you are still working and have not terminated employment yet.
a.) If you are a participant in a Defined Contribution plan (generally a 401(k) or Profit Sharing plan) and you are either older than 59.5, or have reached the plans Normal Retirement Age, or have met the requirements stated in the plan to be eligible for a "pre-termination distribution," chances are very good that you are allowed to take a withdrawal of money at no penalty. However, if you are under 59.5 years old and you take a one time distribution, chances are good that you will incur a penalty in most cases. There is an exception in some cases if the plan has a retirement age of 55 or older and you take your withdrawals the way they must be taken to bypass the "before age 59.5" distribution taxation rules. b.) The question is moot. c.) If you planned your withdrawals to be periodic withdrawals, such as annually, purposely to avoid and penalties on the withdrawals, and you stopped before receiving a certain number of payments, depending on all circumstances involved, you could receive a penalty
John, my advice to you is to seek answers at the time you are thinking of taking a distribution. There are so many variables and planning possibilities that it is very difficult to fully respond to your questions without knowing all your desires and the pertinent facts involved that may also very likely include reading and understanding the provisions of the plan document.
I hope my answers and discussion has helped you or at least helped you to understand the complications that one must deal with before making the best decision for yourself in the circumstances you find yourself in. Always remember that what the right answer is for one person is not necessarily right for someone else.
Thank you for your question.
Herbie Glass, MBA, CPC, CFP, ChFC, CFG, CLU, IAR Glass Retirement Strategies, Inc. Bingham Farms, Michigan
Hello John from Fredericksburg, With regard to your questions about taking money out of your plan: Since you are age 70, you certainly should be able to withdraw any amount of money that you wish from your 401(k), without penalty. In fact the IRS is hoping that you will begin withdrawing, because as you receive distributions from your plan, it gets added to your income- just like a paycheck- and you will most likely have to pay taxes on it. Before you fill out a distribution request form, you will need to decide whether to have taxes withheld. Unless your income (including withdrawals) will be less than about $15,000, my recommendation would be to have taxes withheld. You could check with the person who normally does your taxes to find out how much to withhold.
If you do withdraw retirement funds while still employed, this would be considered an "in-service" distribution. You should speak with your HR department, or the plan administrator, to be sure that their Plan Document allows this.