Can you withdraw money from your 401(k) while you are still employed? Not everyone should; not everyone can. If you are able to, though, it may mean that you can effectively implement part of your retirement income plan before you retire.
If your 401(k) plan permits it, you can take an in-service withdrawal while working for your current employer and then redirect some of those funds into another investment vehicle that may be more suitable for you – perhaps one constructed to offer an income stream.1
Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 72, you must begin taking required minimum distributions.
The reasons why you may want to do this. A non-hardship withdrawal can provide you with early access to a portion of your retirement assets, freeing you to manage them as you wish. You might want to place those assets in other kinds of investments.
A 72(t) strategy could help you avoid an early withdrawal penalty. Ordinarily, if you are still working and pull money out of your 401(k) before age 59½, you will pay a 10% early withdrawal penalty, plus income taxes, on the money you take out. If you still want or need to retire in your fifties, a properly executed 72(t) strategy may help you.2
Internal Revenue Service Rule 72(t) lets you schedule fixed-income withdrawals (referred to as Separately Equal Periodic Payments, or SEPPs) for a period of five years or until you reach 59½, whichever duration is longer. You may receive fixed, equal payments from your current employer’s retirement plan according to one of three distribution methods that Rule 72(t) defines.2
First things first: make sure you can do this. Talk with your employee benefits or human resources officer at work, and see that the Summary Plan Description (SPD) of your 401(k) permits non-hardship withdrawals. Talk with me to make sure it is an appropriate move for you, given your overall financial plan. If you know you’ll need more retirement income, there can be real merit to reinvesting early withdrawals from a 401(k) in vehicles that generate it.
Please reach out if you have something on your mind.
1. Investopedia.com, April 24, 2021
2. Investopedia.com, January 27, 2020
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.