How to access your 401(k) after retirement

When can I withdraw from my 401(k)?
Individuals can begin taking withdrawals from a 401(k) without penalty at age 59½. Withdrawals made before this age typically incur a 10% early withdrawal penalty, in addition to income taxes. At age 73, the IRS requires that Required Minimum Distributions (RMDs) be taken each year. RMDs are the minimum amounts that must be withdrawn from retirement accounts to avoid further tax penalties.

How does a 401(k) withdrawal affect tax returns?
Withdrawals from a traditional 401(k) are generally taxed as ordinary income in the year they are taken. For individuals who have reached age 59½, these withdrawals are subject to regular income tax but no additional penalties. The amount withdrawn is added to the person’s taxable income for the year and may impact their tax bracket. However, if withdrawals are made before age 59½, they are not only taxed as income, but may also incur a 10% early withdrawal penalty, unless there is an IRS-approved exception.

Follow RMD schedule for withdrawals from your 401(k)
It’s important to understand how RMDs affect you and schedule these distributions from a 401(k) each year to avoid penalties. RMD rules apply to traditional (pre-tax) 401(k) accounts and are designed to ensure that the IRS collects taxes on deferred income. The first RMD must be taken by April 1 of the year after the account holder turns 73, with all subsequent withdrawals due by December 31 each year. Failing to take the required amount can result in a significant tax penalty, up to 25% of the amount that should have been withdrawn.

Take money from your 401(k) before you reach RMD age
In certain circumstances, individuals who are between 55 and 59 ½ may be able to take money from a 401(k) without being penalized. The IRS rule states that if a person leaves or loses their job in the same calendar year as they turn 55 or older, they can begin taking penalty-free withdrawals from their 401(k) as long as they leave the money in that plan. If you have a 401(k) plan with a former employer, those funds can be accessed once you turn 59 ½.

Before taking a lump sum from a 401(k), it’s important to weigh the pros and cons. While a lump sum withdrawal provides immediate access to the full balance and the freedom to use the funds however you choose, the entire amount is treated as taxable income in the year it’s withdrawn and can push the account holder into a higher tax bracket. Plus, cashing out early ends the opportunity for future tax-deferred growth and may significantly reduce the savings available for later in retirement.

Convert your 401(k) after retirement
After retirement, some individuals choose to convert their 401(k) into another retirement vehicle, such as an IRA or an annuity. Rolling a 401(k) into an IRA can offer more investment choices, potentially lower fees, and continued tax-deferred growth. Rolling over a 401(k) into an annuity can offer the added benefit of a guaranteed income stream throughout retirement. Annuities can supplement income from pensions, Social Security, and other retirement savings accounts, plus help provide greater financial stability and offer peace of mind in the years ahead.