When you withdraw money from your 401(k), you will face various tax consequences depending on your age and the type of 401(k) account you have.
If you have a traditional 401(k), the withdrawals you make after age 60 will be taxed as ordinary income at your income tax bracket rate. However, you won’t owe early withdrawal penalties since you are older than age 59 ½.
If you have a Roth 401(k), withdrawals after age 60 will not be subject to income taxes provided the retirement account is at least 5 years old since it was opened, and you are age 59 ½ or older.
Do I Pay Taxes on 401k Withdrawals After Age 60?
Once you reach age 59 ½, you are allowed to make 401(k) withdrawals without owing the 10% early withdrawal penalty. However, you will still owe the regular income taxes on the amount withdrawn from a traditional 401(k) account. Funds in a traditional 401(k) grow tax-deferred, and this means you will only pay taxes when the amount is withdrawn.
As a general rule, withdrawals from a traditional 401(k) before age 59 ½ are subject to both income taxes and the 10% early withdrawal penalty.
In limited circumstances, early withdrawals from a 401(k) before age 59 ½ may be exempted from the 10% early withdrawal penalty tax if you have a financial hardship such as funeral expenses, medical expenses, or you are facing an eviction or foreclosure.
How do I withdraw money from my 401k before 59?
Most 401(k) plans limit 401(k) withdrawals before age 59 ½, except in limited circumstances. Here are some of the options you may have:
Hardship withdrawals
Some 401(k) plans allow hardship withdrawals to meet immediate and heavy financial needs. Some eligible financial hardships include medical expenses, purchase of a primary residence, and preventing eviction. If you are eligible for a hardship withdrawal, you will still owe income taxes and an early withdrawal penalty.
Substantially Equal Periodic Payments (SEPP)
You can request to receive a series of substantially equal periodic payments from your 401(k) based on your life expectancy for at least five years, or until you reach age 59 ½, whichever is longer. SEPP allows you to avoid owing an early withdrawal penalty.
Leave job at 55
If you separate from your employer at age 55, you may be able to make penalty-free withdrawals from your 401(k) plan. This is known as the Rule of 55, and it only applies if you leave your job during or after the calendar year you turn 55.
Roth 401(k) contributions
If you have a Roth 401(k) plan with your employer, and you made contributions to the account over the years, you are allowed to withdraw your contributions at any time, even if you are not yet 59 ½. Remember, you can only withdraw the portion of contributions, not earnings; earnings on your contributions may be subject to income taxes, and an early withdrawal penalty if you are younger than 59 ½.
How much can I withdraw from my 401k after 59 ½?
Once you reach age 59 ½, you can make penalty-free distributions from your 401(k). You can withdraw as much as you would like since there is no limit on the amount you can withdraw. You can take as much or as little as you need from your 401(k) account.
Keep in mind that the withdrawals you make are considered taxable distributions, and they can push you to a higher tax bracket rate. If you take a large withdrawal from your 401(k) account, you can pay as much as 32% to 37% to the IRS.
For example, if you withdraw $500,000 from your 401(k) in one year, you could fall in the 35% tax bracket (for both single and married). However, if you want to lower your tax liability on 401(k) withdrawals, you can spread withdrawals over several years, so that you fall in a lower tax bracket.
What is a safe withdrawal rate for 60 years?
A potentially safe withdrawal rate for people age 60 or older is 4% of your retirement savings in the first year, and then adjust this withdrawal rate every year for inflation. The 4% rule helps retirees make sustainable withdrawals, without significantly depleting their retirement savings over a 30-year period.
The 4% withdrawal rule helps retirees strike a balance between preserving their retirement savings to last over their retirement years and living a comfortable retirement lifestyle.
However, this withdrawal rule is just a guideline, and you can adjust the withdrawal rate based on several factors including investment return, retirement goals, expected costs such as healthcare costs, the size of your nest egg, and how long you expect to live.
Can I transfer my 401k to my checking account?
Transferring your 401(k) money to a checking account is an option when you retire or stop working, but you should consider its implications.
Typically, moving your 401(k) retirement money to a checking or savings account is possible, but it will be considered a taxable distribution. This means you will owe income taxes on the withdrawal, and an additional 10% early withdrawal penalty if you are below age 59 ½.
To move your 401(k) money from your 401(k) to your checking account, you can make a withdrawal request to the plan administrator. Typically, it can take about one week to process the withdrawal request and disburse the withdrawn amount. The plan administrator can either issue a check with your 401(k) disbursement or make a direct deposit to your checking account.
However, if you are still employed by the company sponsoring your 401(k), you won’t be allowed to transfer your 401(k) money to a checking account, unless in limited circumstances. Most 401(k) plans do not allow in-service withdrawals while you are actively employed.
Can I withdraw all the money from my 401(k)?
It is possible to withdraw the entirety of your 401(k), but beware that you will only receive what is left after taxes and penalties (if you are younger than 59 ½). However, you may only be allowed to cash out your entire 401(k) once you leave or retire.
If you are actively employed by the company sponsoring your 401(k), there are limits on the amount you can withdraw. If you take a 401(k) loan, you can only borrow the lesser of half of your vested 401(k) balance or $50,000. If you qualify for a hardship withdrawal, you can only withdraw an amount required to satisfy your financial hardship.
Conclusion
If you are considering making withdrawals from your 401(k) after age 60, you should consider the tax implications. While individuals aged 59 ½ or older can make penalty-free withdrawals from the 401(k), the amount withdrawn is still subject to income taxes, depending on your tax bracket.
While it is allowed to cash out the entire 401(k) account, it is advisable to spread distributions over several years to reduce the tax liability. A safe withdrawal rate is the 4% withdrawal rule, which ensures that the retirement savings can last at least 30 years. However, you can adjust this rate based on your financial situation, financial goals, the size of your nest egg, and how long you expect to live.