401(k) Retirement Ages and the Rules

401k rules based on age

If you are like most people, a majority of you wealth and retirement money is tied up in your 401(k). If this is you, then you need to know the rules about how you can get your money out. Many of these rules are age based and if you don't follow them you could be in for some very expensive penalties and taxes.

Any Age Below 55

You can get your money out of your 401(k) before you turn 55 but you had better be moving it into another tax deferred account otherwise you will be paying taxes and a 10% penalty. While, it's not advisable to just take a withdrawal from your 401(k) rolling it over into a qualified IRA is usually a good idea. By doing this you gain more control over your money and have access to many more investment options (usually at lower fees) than what can be found in your 401(k) plan.

There are a few exceptions that the IRS provides for taking out your money tax free but they are very strict. The exceptions are death (I told you they were strict), qualifying disability, medical bills and disaster relief. All of these exceptions have their own special rules so make sure you do more homework before pulling your money out.

Age 55

The youngest you can take your money out of your 401(k) without penalty is age 55. You need to be separated from service no earlier than the year you turn 55. This means retired, fired, laid off, etc. If you retire at age 54 and then turn 55, this opportunity is not available to you and if you pull your money out you will still be subject to the 10% penalty. Also, if you roll your money over to an IRA this option is not available to you. So, let's say you follow the rules, retire after turning 55 and don't rollover your money. If that's your situation then yes you can get your money out early without penalty (but remember you still have to pay taxes).

Age 59.5

Once you get to age 59 and a half, there are less restrictions on getting you money penalty free however it still depends on whether or not you are still working for your employer.

Simply put, if you no longer working for your employer and you're age 59 and a half you can take money from your 401(k) plan without any penalty. Again, you still have to pay the tax, there's no getting around that. 

If you are still employed and have reached the age of 59.5 you may or may not be able to get to your money. It depends on your employer. You need to check to see if your employer allows "In-service distributions." Some 401(k) plans allow it others do not. Keep in mind this is only for your current employer. If you have an old 401(k) from a previous employer and are 59.5 you can get your money out of that 401(k) without penalty. 

Age 70.5 

Now that you have reached 70 and half, the IRS actually wants you to start taking money from your 401(k). They want their taxes, so at this age you are subject to "Required Minimum Distributions." This just means that you need to start drawing money from your 401(k) each year. The calculation can get a little complicated but you can find many resources online to help with the calculation (like here). If you are still employed (are not an owner in the company) and do not want to take any money out, your 401(k) plan may offer an exception. Again, you need to check with your plan administrator to see if it's possible.

Now that you know how to get your money out of your 401(k) you need to ask the next question, "Should You?" This is where it gets complicated because there are no hard and fast rules. If you need to fund retirement and are no longer working, well, the money has to come from somewhere. But you can be smart about it. Do you have other sources to pull from, like a Roth IRA? If so, you should be careful to utilize your lower tax brackets first and try not to push yourself into the higher tax brackets. You can save a lot of money on taxes just by being smart about where you pull your money from. If you need help finding the best way to access your cash and fund your retirement make sure you reach out to a financial advisor for help. Finding a Fee-Only financial advisor is the way to go.