At the end of your working life, you find you've done pretty well. You made regular contributions to your 401(k), and perhaps your employer matched them. Over time, with principal and interest, funds accumulated to a sizable sum. Now, you're ready to benefit from your savings and investment discipline. Taking your hard-earned money out should be the easy part. Beware: even after retirement, 401(k) withdrawals can result in tax liability. Advice from a competent tax professional is strongly advised as you make your withdrawal plans.
Take a Lump-Sum Distribution
Contact your 401(k) plan administrator. Check with her about any rules that are specific to the company plan. Companies can apply to their 401(k) plans rules that are separate from IRS restrictions. Be sure you understand your company plan and review any specific regulations with a tax or financial professional before taking any action.
Request a lump-sum withdrawal. You will receive a check for the total amount in your account, minus 20% that will be withheld for federal taxes. If you are younger than 55 years old, the company will also take an additional 10% penalty out of your check.
Report the 20% that was withheld from the withdrawal when you file your taxes for that year.
Roll the Funds Into an IRA or Solo 401(k)
Contact your 401(k) plan administrator.
Ask the administrator to make a direct--or trustee-to-trustee--rollover of your 401(k) money into an IRA or Solo 401(k). You will not be subject to the 20% tax withholding. However, you can only open a Solo 401(k) if you plan to start a one-person enterprise.
Make withdrawals according to the rules of your IRA or Solo 401(k). If you need clarification about these rules, get advice from a qualified financial advisor.
Take the Minimum Required Distribution
Contact your 401(k) plan administrator before April 1 of the year following your retirement.
Take the minimum required distribution (MRD), beginning April 1 of the year following your retirement. The MRD is established by the IRS. It can be calculated by dividing the adjusted market value of your 401(k) by the number of years you are expected to live. The life expectancy figure is derived from what is called the Uniform Lifetime Table. You can find MRD calculation tools online. Your plan administrator may also have information on how the MRD is derived.
Take the MRD by December 31 of every year following your retirement. If you don't, the IRS will charge you a penalty equal to 50% of the MRD. You will also have to pay regular federal, state, and local taxes on the full MRD amount. Taxes and penalties can add up, so be sure to respect the end-of-year deadline.
If you separate from a company--whether you retire or leave for some other reason--after age 55, you can withdraw your 401(k) funds without a 10% tax penalty.
If you have less than $5,000 in your account when you leave the company, your employer will provide you with a check for your 401(k) funds, minus the 20% withholding, whether you ask for it or not.
The Internal Revenue Code undergoes revision regularly. Verify current tax law by consulting a qualified professional.