How to begin withdrawals from your 401(k)
Dear Retirement Adviser,
I am 67 years old, having retired Sept. 30, 2013. Here's my question: How much of a penalty will I have to pay if I cash in my 401(k)? Or, can it be put in some other kind of an account which would allow me monthly withdrawals to supplement my Social Security?
-- Ginny Gone
Congratulations on your retirement! Here's some good news. You don't pay a penalty to cash out your 401(k). The Internal Revenue Service charges a 10 percent penalty tax on early distributions before age 59 1/2. At 67, you don't have to worry about a penalty.
You still need to be smart about how you take distributions out of the account. Plan contributions to a 401(k) are typically tax-deferred, meaning they become taxable when you take them out of the account as a distribution. Take the money out all at once and you could substantially increase your marginal federal income tax rate. Spread it out over time and you can manage your tax exposure. Required minimum distributions, or RMDs, start with the year you turn 70 1/2
You can choose a rollover to a traditional individual retirement account if you don't want to keep the money with your former employer's 401(k) plan. It's best to perform a trustee-to-trustee or direct rollover. If the plan sends you a check, then the payment is subject to a 20 percent mandatory withholding. That means you'll have to come up with the 20 percent to fully fund the IRA. You could also choose to convert to a Roth IRA, but the rollover is taxable. Speak with a tax professional if considering a Roth IRA conversion.
Monthly withdrawals from your retirement account are easy to accomplish. If you wanted guaranteed lifetime income, you could consider purchasing an immediate fixed income annuity. It can be a difficult decision to commit to a fixed annuity with today's low interest rates. Getting professional advice before making this kind of financial commitment is important. You might want to wait and see if interest rates rise in the next year or so.
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