What are the tax implications of withdrawing from my 401(k)?

What are the tax implications of withdrawing from my 401(k)?

Withdrawing from your 401(k) can have significant tax implications. Generally, if you withdraw funds before age 59½, you may face a 10% early withdrawal penalty, in addition to regular income tax on the amount withdrawn.

Are there any exceptions to the early withdrawal penalty?

Yes, there are exceptions. For instance, if you become permanently disabled, have medical expenses that exceed 7.5% of your adjusted gross income, or if you are using the funds for a first-time home purchase, you may avoid the penalty.

What about taxes if I roll over my 401(k) to an IRA?

If you do a direct rollover from your 401(k) to an IRA, you typically won't owe taxes at that time. However, if you take a distribution and then deposit it into an IRA, you must do so within 60 days to avoid taxes and penalties.

How can I minimize taxes when withdrawing from my 401(k)?

To minimize taxes, consider withdrawing only what you need, spreading withdrawals over multiple years, or converting to a Roth IRA if eligible, which can provide tax-free withdrawals in retirement.