If you are fortunate enough to have access to a 401(k) plan, then you have a real opportunity to sock away some meaningful dollars for retirement. These employer-sponsored plans allow you to contribute up to $19,500 in 2020. Some employers will also match some of your contributions, which means free money for you.
But you cannot let your money sit in your 401(k) account forever. Uncle Sam might be willing to let your accounts grow tax-deferred as an incentive to save, but he eventually demands his cut.
Like traditional IRAs, 401(k) plans come with strict rules regarding required minimum distributions, or RMDs. These withdrawals are subject to income taxes and other rules, and if you do not take your required distributions on time, you could face some pretty stiff penalties.
Here are a few things you need to know:
- You must take distributions starting at 72. Your first RMD is due by April 1 of the year following the year you turn 72. The IRS provides an RMD table (IRS Publication 590) to calculate your minimum distribution. You will be slapped with a 50% penalty on whatever amount you fail to withdraw.
- You can take penalty free distributions starting at 59 1/2. Because you get an immediate tax break for contributing to a 401(k), you are expected to leave that money alone until you reach a certain age. As per the current rules, that age is 59 1/2. From there, your money is yours to withdraw as you see fit.
- If you cash out your 401(k) after leaving a job, it could count as an early distribution. Should you leave your job before the age of 59 1/2, or you leave for a company that does not offer a 401(k), you will need to roll the funds into an existing IRA or set up a new retirement plan within 60 days. Fail to do so, and you are hit with that unpleasant early withdrawal penalty
Saving in a 401(k) is a smart way to establish a strong retirement nest egg. Check out Shelton Capital’s library of 401(k) Educational Videos to help you make good choices and stay on a good retirement track.