Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




401k early withdrawal penalty

Reply to topic
Money Talk > Retirement Planning

Author Thread
Pascal666
New Poster


Cash: $ 0.45

Posts: 2
Joined: 28 Jun 2013
Location: Chicagoland
401k early withdrawal penalty  Reply with quote  

I've found several websites that say if you are younger than 59.5 you may face an early withdrawal penalty from a 401k of 10%. I assumed this meant if you are over 59.5 there would be no penalty. After submitting the paperwork I'm being told our plan imposes the early withdrawal penalty if you are under 65. Is this legal? Is 59.5 the minimum age and plans can select any age they want over that? Or is 59.5 the maximum age that plans can select? Or the only age? Please let me know where this is codified. Thank you.
Post Fri Jun 28, 2013 6:08 am
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

59 1/2 is the only age mentioned anywhere on the IRS website, however they use the qualifier word "generally" which means there are exceptions, and I think I may have found an exception on Nolo's website, which says:
quote:
And if you were to retire and leave your money in your former employer's 401(k), the terms of the employer plan might preempt the federal rule. For example, the plan might require you to wait until you reach a specific age -- 62 or 65 are common cutoffs.

Check with your 401(k) plan administrator. Get a copy of the plan document. The plan rules are what bind you, and where a variance has been approved, you are bound by the variance.

~Tim~
Post Fri Jun 28, 2013 2:55 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 748.25

Posts: 3638
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
Or is 59.5 the maximum age that plans can select? Or the only age? Please let me know where this is codified. Thank you.


Even if your company's rule is other the 59 1/2, when you quit/retire you can roll your 401k into a Trad IRA (a non-taxable event). And then the Federal code applies (I think it's Pub 590) - ie, the age is 59 1/2.
Post Fri Jun 28, 2013 3:25 pm
 View user's profile Send private message
Pascal666
New Poster


Cash: $ 0.45

Posts: 2
Joined: 28 Jun 2013
Location: Chicagoland
 Reply with quote  

Still employed with the company the 401k is through.

So if a company writes their 401k such that employees can't pull any money out without penalty until they are over 90, that is legal? They can just force you to either pay the penalty or quit if you want your money?
Post Fri Jun 28, 2013 3:56 pm
 View user's profile Send private message
oldguy
Senior Member


Cash: $ 748.25

Posts: 3638
Joined: 21 May 2006
Location: arizona
 Reply with quote  

quote:
Still employed with the company the 401k is through.


You cannot take money from a 401k while you are employed there - you must either quit or retire. You can borrow from an active 401k, but you cannot cash out money.
Post Fri Jun 28, 2013 4:41 pm
 View user's profile Send private message
clydewolf
Senior Member


Cash: $ 50.25

Posts: 248
Joined: 27 May 2012

Re: 401k early withdrawal penalty  Reply with quote  

quote:
Originally posted by Pascal666
I've found several websites that say if you are younger than 59.5 you may face an early withdrawal penalty from a 401k of 10%. I assumed this meant if you are over 59.5 there would be no penalty. After submitting the paperwork I'm being told our plan imposes the early withdrawal penalty if you are under 65. Is this legal? Is 59.5 the minimum age and plans can select any age they want over that? Or is 59.5 the maximum age that plans can select? Or the only age? Please let me know where this is codified. Thank you.

You have been provided with the correct information.

Federal rules have a penalty for taking money from an IRA/401k type accounts before the account owner is age 59 1/2. Note that for an IRA there are some exceptions to that age limit for the early distribution Penalty.

As a minimum your employer must abide by the federal rules. The employer plan may have rules that are more constraining.

Get a copy of your 401k plan's Summary Plan Description (SPD). You should have received a copy of the plan when you signed up to make contributions to the plan. Probably there have been changes to the plan since then, so ask for a current copy of the SPD. Some times the SPD is available at the administrator's website. Whatever the form of the SPD you should take the time to read that document.
Post Fri Jun 28, 2013 10:55 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

quote:
Originally posted by Pascal666
So if a company writes their 401k such that employees can't pull any money out without penalty until they are over 90, that is legal? They can just force you to either pay the penalty or quit if you want your money?

Well, no, because the IRS requires distributions to begin no later than age 70 1/2.

I suspect the age 65 applies because that is the normal retirement age at your company, and since you can't take distributions while you're still working, it's assumed you can't take them until age 65, after you retire. I'm guessing that if you retire early, the age 65 probably won't apply. As suggested above, check your plan summary, or run that past the plan administrator, and let us know what you find out....whether or not you can take distributions earlier if you retire early.

And also as noted above in another post if you do retire earlier you can roll it into an IRA, and then the plan restrictions won't apply any more.

~Tim~
Post Sat Jun 29, 2013 4:27 am
 View user's profile Send private message
blixet
Preferred Member


Cash: $ 32.55

Posts: 156
Joined: 28 Apr 2013
Location: Southern California
 Reply with quote  

As a side note, there is an exception to the 401k RMD rule for those who are still working at 70.5 and own less than 5% of the business. Under those specific conditions, an employee is not required by the IRS to begin RMDs although the company's plan may require that the employee begin taking distributions.

Information is more valuable sold than used – Fischer Black
Post Sat Jun 29, 2013 1:44 pm
 View user's profile Send private message
clydewolf
Senior Member


Cash: $ 50.25

Posts: 248
Joined: 27 May 2012

 Reply with quote  

quote:
Originally posted by blixet
As a side note, there is an exception to the 401k RMD rule for those who are still working at 70.5 and own less than 5% of the business. Under those specific conditions, an employee is not required by the IRS to begin RMDs although the company's plan may require that the employee begin taking distributions.


And another IRS exception to the penalty for a distribution from a 401k before age 59 1/2...
If the account owner is age 55 or greater when they separate from the sponsoring employer, they can take penalty free distributions from the 401k plan.

This and the distribution rules for employees at age 70 1/2 mentioned by Blixet should be identified in the Summary Plan Description for the 401k. It is good to read that document and the changes that are announced as the rules for 401k and IRA plans do change.
Post Sat Jun 29, 2013 2:38 pm
 View user's profile Send private message
coaster
Senior Advisor


Cash: $ 1626.30

Posts: 7990
Joined: 11 Oct 2005
Location: Wisconsin
 Reply with quote  

OK, thanks for the clarifications, guys!! Smile

I think it goes to show that the 401(k) rules are so damn complex that when you've got a complex question you'd best be sure to go to someone who knows the ins and outs of all that complexity.... AND .... (where I confess I often get tripped up) has kept up-to-date on constant changes.

~Tim~
Post Sun Jun 30, 2013 5:00 am
 View user's profile Send private message
Anton Martin
Full Member


Cash: $ 15.00

Posts: 73
Joined: 23 Nov 2012
Location: Florida, USA
 Reply with quote  

Well, referring to your 401(k) plan administrator can make lot of sense, as they can provide you better idea and can guide you in better direction. Also having your 401(k) plan documents with you also help you to understand all possibilities and penalties of withdrawal.
Post Mon Jul 01, 2013 10:25 am
 View user's profile Send private message Visit poster's website

Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2018