The 401(k) Retirement Withdrawal Rules==>[04 Hard Facts You Should Know]

The 401(k) Retirement Withdrawal Rules==>[04 Hard Facts You Should Know]




Welcome to my article which provides important insights about The 401(k) Retirement Withdrawal Rules.

If you are still trying to figure out whether this retirement plan is one you should invest your funds into, then this article is a must-read for you. If on the other hand, you already have a 401(k) retirement plan, then congratulations, but make sure to read right to the end. Why? Because there are some hard facts you need to know about this plan, which will determine whether or not diversifying your investment options is inevitable with this solution. So what are the 401(k) Retirement Withdrawal Rules? Continue reading to discover 04 Hard Facts You Should Know.




What Is A Retirement Withdrawal?

A retirement withdrawal is any withdrawal made from your retirement savings accounts, irrespective of whether the withdrawal took place before or during retirement.

Considering the fact that most retirement accounts are tax-deferred accounts, these withdrawals are not without consequences and often result in penalties especially when they take place before a certain age.

When it comes to the 401(k) retirement plan, in particular, you should definitely acquaint yourself with the 401(k) Retirement Withdrawal Rules before you even consider this retirement savings option.

Let’s get right into things to understand some 04 hard facts you should know: what penalties are involved here, what are the various conditions surrounding your withdrawal activities? Etc…



The 401(k) Retirement Withdrawal Rules==>[04 Hard Facts You Should Know]
The 401(k) Retirement Withdrawal Rules==>[04 Hard Facts You Should Know]

IRS defined retirement hardship as a

…heavy and immediate financial need of the employee

and the amount requested must be necessary to meet that financial need. It’s refreshing to know that this need includes those of your spouse, dependent, and also non-spouse and non-dependents beneficiary.

The following is a list of the nature of expenses that the IRS can consider to be heavy and immediate:

  • certain medical expenses;
  • costs relating to the purchase of a principal residence;
  • tuition and related educational fees and expenses;
  • payments necessary to prevent eviction from, or foreclosure on, a principal residence;
  • burial or funeral expenses;
  • certain expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRC Section 165.

Here are some hard facts you need to know about hardship withdrawals with the 401 (k) retirement plan:

When you decide to go in for this retirement savings option, know that you forfeit complete control over the resources you invest, until when you reach 59-1/2–>70 1/2. Here are some facts you should understand:

  • The use of the word ”certain medical expenses” can leave room for a lot of speculations. Always consult with a professional for assistance with regards to the nature of medical expenses involved here;
  • Your withdrawals will be subject to applicable income taxes;
  • They will equally be subject to withdrawal penalty of 10% with a few exceptions listed further down);
  • Your assets as a whole are evaluated to determine the need to release your funds to cater to specific hardships. This is because if it is determined that you have other resources that can help out, with proof available, you might not qualify to withdraw your own funds. What does this mean? If you are in desperate need of finances to solve one of the major problems listed above by the IRS, you risk losing your vacation home or some of your luxury assets if you have any. Once it is proven that you have any of such assets at your disposal, IRS recommends that those assets be sold instead.
  • Using the criteria ”heavy” and ”immediate” to determine how bad you need some hardship withdrawals could also classify expenses you consider as heavy to be non-significant in the eyes of IRS.
  • After you make your hardship withdrawal, you will not be able to contribute to your 401(k) plan for 6 months, after which you can top it up to the acceptable yearly limit.

There are many more but I personally find some of the conditions to be too stringent.

Take, for instance, it takes time to amass some strategic assets such as vacation homes. Imagine for a second that you personally own one, but for some reasons, your health is failing. You know for a fact that the amount you have saved in your 401 (k) can attend to your health issues without any need to dispose of any of your assets.

But the sad news here is that you might have to let go of those valuable assets, simply because you have your funds invested in the 401(k) plan. Good for you if you have many other plans working for you, with flexibility when it comes to withdrawing.

That’s not all. Why should the withdrawal be subject to penalties when the funds are needed to solve emergency issues? This is another hard fact you need to deal with when using this plan.

But there are few exceptions where you can avoid the 10% tax penalty:

  • You are disabled
  • Your medical debt exceeds 7.5 percent of your adjusted gross income
  • You are required by court order to give the money to your divorced spouse, a child, or a dependent

If not, then pay the price for withdrawing your own money, or better still, consider other flexible and more effective retirement options that will not push you to dispose of your assets when you really don’t have to.




2. 401(k) LOANS


While some experts recommend that you should avoid taking advantage of the 401(k) hardship withdrawals options, and exhaust other opportunities such as taking a 401(k) loans instead, it would rather appear that taking 401(k) loans is far worse than the former option.

Before we delve into why 401(k) loans are not any better, let’s check out some of its characteristics below:

  • These loans are subject to legal loan limits’;
  • They would be repaid through payroll deductions;
  • Interest rates are determined by the rules of the 401(k) plan, and the interests will be paid back into your 401(k) plan;
  • If you no longer work for a company, where your 401(k) plan resides, you cannot take a loan from there;
  • You pay no amount once you take the loan, but be sure to repay on time, as any late payments will result in due taxes and penalties.

I can only identify one advantage of burrowing from your own 401(k) account: money simply moves from one pocket to another, without any real charges incurred since all interests are paid back to your account. So the loan conditions are far better than what you would find in a bank.

So why it is not recommended to borrow from your 401(k) account?

  • You end up paying taxes twice. Let me explain. When you pay interest on the loan back to your 401(k) account, the source used to pay is your after-tax salary which has already been taxed. Once you reach retirement and start taking distributions, your interest will be taxed for the second time at withdrawal during retirement.
  • The 401(1) is protected from creditors, so taking money from it to pay these creditors is not strategic;
  • If you leave your job before the complete payment of the loan you withdrew from your account, the outstanding balance will be treated as a taxable distribution.

In general, hardship withdrawals and 401(k) loans should be avoided altogether because they reduce funds in your account, thereby reducing the amount which can compound over time.

But we live in a reality where unpredictability is part of life. What does this mean? We fall sick, our brothers, sisters, children get married, go to school, etc… It’s life and we need to live with the pace.

So if you find yourself thinking about withdrawing what you have already saved towards retirement, irrespective of the plan you have used, it’s perfectly normal, and you should not feel guilty.

But when you keep going back and withdrawing the little you have saved so far, then opening up a retirement savings account might not be the best way to prepare for that retirement after all. Because it tends out to be more expensive both in the short and long run.

What other better and more effective solutions are available?

You would have to start diversifying your sources of income right now if you don’t want a rather predictable woe to catch up with you during retirement. It’s not late to start checking out other alternatives provided you start checking them now.






The 401(k) Required Minimum Distribution is the minimum amount you must withdraw from your account each year.

According to ISR on the subject of required minimum distributions, you are supposed to start taking withdrawals from your retirement account when you reach the age of 70-1/2.

These withdrawals will be characterized by the following:

  • You can withdraw more than the minimum required amount;
  • Your withdrawals will be treated as taxable income with the exception of that portion which has already been taxed;
  • The required minimum distribution is determined by dividing your balance in your retirement account as at the end of the preceding year, by the total number of your life expectancy. For instance. Let’s assume that we are in 2019.  If your retirement account holds a generous amount of $4Million, as at December 31st, 2018, and your life expectancy as per the Uniform Life Table is 27 years, it means your RMD for 2019 will be $4000000/27=[$148,148]. The same calculations will be made every year to determine the new RMD since the retirement account balance would have reduced by distributions, and also adjusted for your new life expectancy age (it reduces by 1 every subsequent year);
  • You should withdraw your first RMD by April 1, following the year in which you became 70-1/2 or you retired. For instance, still assuming that we are in 2019. If you became 70-1/2 (or retired) on February 25th, 2018, you have up to April 1 of 2019 to collect your first RMD. Likewise, if you reached 70-1/2 in December 2018, you must take your first RMD by April 1, 2019;
  • If you fail to take your distributions, you would be liable to a 50% excise tax on the amount not yet distributed, and required to file in Form 5329 to report this tax;

Here Are Some Of The Hard Facts About The Information Presented Above Which I Really Do Not Appreciate:

  • At retirement, we seriously do not need to be bothered by technical knowledge and keeping records of amounts withdrawn to avoid the 50% excise tax. The only way to avoid this is to hire a professional, and if your budget cannot permit, you will be facing a lot of difficulties following this up on your own;
  • The last time I checked, the average life expectancy of the people living in the USA currently stands at only 69.1 for both males and females. If this is not ringing a bell in your head, you should stop reading this article and think about it for a second time. Let me give you a hint. It is assumed by the Uniform Life Table that you will live an additional 27 years after 70, whereas actual statistics are revealing that you would actually be d**d before you even reach the age of 70! Please don’t panic as this might not apply to everyone, plus these figures are meant for statistical purposes only. There are some favorable rules though, allowing you to start withdrawing your 401(k) retirement funds at 59-1/2.

These are some of the hard facts governing the 401(k) Retirement Withdrawal Rules. Not only is it not recommended to withdraw once you start saving (something which is very impossible for the average American), but you would also have to wait up to 59-1/2 years to start withdrawing.

I love to be in total control of what happens to me during retirement while avoiding the loopholes of the system altogether. If you have been able to deal with the challenges mentioned above, then congratulations.

But chances are you are still lagging behind your retirement savings and wondering where to start. Don’t worry if you have not yet saved a cent. In fact, you should rather feel more confident and determined to make it work with alternatives to savings that are more healthy and can even increase your lifespan because of the relatively low pressure you are under as opposed to saving every single month.





I know that you might be interested in finding out what sort of withdrawals are actually penalty-free when it comes to the 401(k) plan. Let’s check them out below:

  • You can make penalty-free withdrawals from your 401 (k) after the age of 59-1/2. Any withdrawals before will bear a 10% tax penalty, and of course, income tax;
  • There are exceptions where you can make penalty-free withdrawals before the age of 59-1/2, which will include the following:
    • You are disabled
    • Your medical debt exceeds 7.5 percent of your adjusted gross income
    • You are required by court order to give the money to your divorced spouse, a child, or a dependent

The 401(k) retirement plan was designed to limit withdrawals as much as possible, so even if you qualify for most of the hardship withdrawals, you might still end up paying 10% penalty of the expenditures included under this heading.

So make sure to always get professional advice when you start thinking of making any withdrawals from your 401(k) account.




I’ve published a couple of work-related articles you might be interested in:



Very strict measures have been implemented to make sure that you avoid returning to this plan as much as possible to meet up with certain emergencies. It is so strict to the extent that even when you make use of the hardship withdrawal option, everything you take before the age of 59-1/2 will still bear the 10% penalty tax.

So what’s my take?

If you do not have sufficient financial resources, then you should avoid this plan as much as possible. It’s absolutely ok to need money from time and time but to pay penalty on funds which actually belong to you simply because you urgently need cash is not cost-friendly.

Saving is good, but it’s not meant for everyone. If you have not succeeded to save a substantial amount towards retirement, then I strongly suggest that you try something completely different and unconventional which has absolutely nothing to do with savings:

I hope you found my article informative. Don’t hesitate to leave a comment below if you need more clarifications about The 401(k) Retirement Withdrawal Rules

✌✌Thanks for reading.✌✌


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