Know the 401k Withdrawal Rules

If you are confused by the new 401k withdrawal rules, you can rest assure that you are not alone. This is because the Internal Revenue Service recently released a proposed rule change that will make the process much more complicated for most individuals. What exactly does this mean to you? Basically, this rule change will make it so that any money that you withdraw from your 401k account must be handled according to a number of different factors. These different factors including how much money you have in the account, what type of investments you have made, and whether or not you have made contributions to the fund in the recent past. In short, if you fail to comply with some aspect of this new rule, you could find yourself facing some serious tax consequences.

Let’s take a look at one of the biggest proposed changes in 401k withdrawal rules: the hardship withdrawal rule. What is this and why is it being put into effect? According to the IRS rule, you are not allowed to take money out of your 401k account during a two-year period that you are delinquent in making contributions to the fund. If you meet this two-year requirement, you then have to wait a full year before you are allowed to take money out of the account. If you fail to comply with this portion of the rule, you could find yourself paying a hefty fine. However, the fines often do not amount to very much and are usually not as severe as the penalties that would be levied on a delinquent contribution to a traditional IRA.

Know the 401k Withdrawal Rules

One of the other rules under the 401k withdrawal rules that are often overlooked is the one that requires the trustee to report any early distributions that have been made. The reasoning behind this rule is that the late distributions are not necessarily from the liquidated funds that would be subject to the early withdrawal penalty. Instead, the reasoning goes on to say that the distributions might be from non-taxable funds and thus would not be taxable.

There are many people that are not aware of the existence of these rules and end up getting penalized by the IRS. This is because they do not fully understand the nuances of the various rules and regulations that are applicable to their situation. For those people that are not aware of the 401k withdrawal rules, it might be helpful to get the assistance of a qualified financial planner or an attorney to help make sure that everything is crystal clear. This will ensure that you do not run afoul of the IRS and get hit with heavy tax penalties.

Another rule that is often overlooked is the one that says that you are not allowed to make any withdrawals for the entire year if you met certain requirements. These requirements generally include not being disabled or not receiving any compensation from an employer that was terminated during the year. Basically, if you can meet the requirements and still decide to make a withdrawal, you are not really required to do so. The penalty for this is quite high, which explains why it is often neglected by people.

The best way to avoid penalties is to ensure that you learn about the various rules that govern your 401k accounts and the various kinds of distributions that are allowed as well. In addition, you must also know when you are allowed to start taking distributions and how much is allowed each month. By doing so, you will know whether or not you need to take a big withdrawal in order to avoid hefty tax hits. You should also keep in mind that you will need to consult a professional in order to get the right advice as to which distribution plan is best suited for your needs.