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If I take out withdrawals from my 401(k) after age 59 1/2, are those distributions taxed as income?

Your age does not matter. A distribution from a 401 k is considered income.

The IRS allowed for pre-tax personal contributions. They also allowed the gains to grow tax deferred for years. There comes a point when the IRS stops being so generous and wants their tax. This happens when you start to take a distribution from the plan. You in effect become your own paymaster – meaning you can determine the amount of the distribution. If your 401 k contributions were traditional personal deferrals the answer is yes you will pay income tax on your withdrawals. If you take withdrawals before reaching the age of 59 ½, the IRS may also impose a ten percent penalty.

If you don’t take any distributions and reach the age of 70 ½ , the IRS will step in and force you to take a distribution. They are called Required Minimum Distributions (RMD’s). The IRS’s rationale is “hey time to pay up – you aren’t getting any younger”. The IRS has a schedule and they will tell you how much your minimum distribution will be. This distribution of course will be considered income and will add to your other income for the affected year.

Assuming your 401 k is traditional and not ROTH, a distribution will be taxed as income. This distribution will be added to your other income for the year and may or may not push you into a higher tax bracket. It would be prudent to seek a tax professional and do some tax planning.

What is the tax rate of withdrawing from 401(K) before 59 1/2?

Anyone who withdraws from their 401(K) before they reach the age of 59 1/2, they will have to pay a 10% penalty along with their regular income tax. However, you can withdraw at the  age of 55 without penalty in a circumstance where you cannot be a employee of a company who runs your 401(K) and you must have left the company, during or after the calendar year when you turn 55. This is also called as a rule of 55.

What is the earliest age to withdraw from 401(K)?

As per the rule participant may begin to withdraw money from their 401(K) once he or she reaches the age of 59 1/2 without paying 10% early withdrawal penalty. If you don’t need money, you can wait till 70 1/2. But, once you reach the age of 70 1/2, but you have no option, but to withdraw your money from your 401(K)

 

If you would like further information, please visit www.sdretirementplans.com or call us at 866 639 0066.