The point of investing in a 401(k) plan is to build your savings for retirement.  Generally, if an individual withdraws from their 401(k) plan before reaching age 59½ they are taking what are called ”early” or ”premature” distributions. As such, individuals must pay an additional 10% early withdrawal tax, unless an exception applies, AND include the amount of the distribution in their income when they file their income tax return.

Sometimes you have no choice and are forced to tap into your account.  Here are some ways that you can make withdrawals and avoid getting hit with penalties for doing so.

Age – Begin after age 59½ once you leave your employment (at any age).

Separation From Service – Begin after you separate from service during or after the year you reach age 55 (age 50 for public safety employees in a governmental defined benefit plan).

High Unreimbursed Medical Expenses – If you, your spouse, or your qualified dependent face these expenses, you may be allowed to withdraw a limited amount (the actual expenses minus 10% of your AGI) without penalty.

Death – If you die, your beneficiaries are able to take distributions from your 401k without penalty.

Disability – If you are “totally and permanently disabled” by IRS definition, you may be able to take distributions from your 401k without penalty.

Series Of Substantially Equal Periodic Payments –  Essentially you agree to continue taking the same amount from your plan for the greater of five years or until you reach age 59½. There are three methods of doing this:

  1. Required Minimum Distribution method – This uses the IRS RMD table to determine your Equal Payments.
  2. Fixed Amortization method – Under this method, you calculate your Equal Payment based on one of three life expectancy tables published by the IRS.
  3. Fixed Annuitization method – This uses an annuitization factor published by the IRS to determine your Equal Payments.

IRC Section 72(t) provides additional methods for taking a distribution from your 401k which can occur before leaving employment (if the plan allows).  However, note that the following are NOT applicable to a 401(k), but DO apply to an IRA withdrawal:

  1. Qualified higher education expenses
  2. Qualified first-time homebuyers, up to $10,000
  3. Health insurance premiums paid while unemployed

So if you are considering using your 401(k) funds for any of the above, you might want to make a “trustee-to-trustee” transfer to an IRA account first and then take the distribution from that account.