401k distributions are withdrawals from your 401k account. This money is, yours to use whenever you need it, however, it is not taxed when you place it in the 401k account. As a result, the IRS has a right to enforce regulations regarding the use of the money in the future. Namely, you cannot access the money before you reach the qualified retirement age of 59 1/2 without penalty. Once you do reach that age, you may begin taking distributions without penalty. Once you reach age 70 1/2, you must take distributions or you will again face penalties.

Early Distributions

The IRS provides tax incentives for you to save this money for retirement. It does so to reduce the burden the cost of your retirement will place on the federal government and other citizens. When you take money out of the account before you retire, you are going against the stated purpose of the account. As a result, any time you take money out of your account before your qualified age you are taking an early distribution and will be subject to penalties.

Early Distribution Penalty and Taxes

You will be assessed a 10 percent penalty on the distribution. This penalty goes into effect very quickly; you do not get to take money out then put it back in before the end of the year. If you were permitted to do this, you could invest the money, earn interest on it, then repay only the portion that was initially in the account. In an effort to prevent you from removing your money to build interest, you must replace the money within a narrow window of time. If you fail to replace the funds, you will have to pay income tax on the distribution, in addition to the 10 percent penalty.

Exceptions to the Rule

There are a few exceptions that apply to 401k savings. You may take money from the account on a loan in order to pay for your first home or for a college tuition. These 401k loans are not universally offered by all employers. Since 401k accounts are administrated on the corporate level rather than the individual level, you will be subject to the rules of your employer who manages the account when you ask to borrow money.

Required Minimum Distributions

Once you reach retirement age, there is a point where you must begin spending your savings to avoid taxation. This point is age 70-1/2. Once you reach 70-1/2, you will have to take required minimum distributions (RMDs). The amount you must withdraw depends on your age, life expectancy and the sum of your savings. You must recalculate your RMD each year and be sure to withdraw the money from the account. The penalty on missed RMDs is 50 percent of the amount you failed to withdraw. The IRS creates a situation where the only truly beneficial time to withdraw from your 401k is during your retirement, and at that point you must do so regularly.

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