Owen's not the only one asking this question. According to the Wharton School of
Business, in the next 10 years over 10 million people will reach age 65. So
quite a few folks will be looking for an answer.
First a disclaimer. Before making decisions that could significantly affect your
taxes, it's wise to see a qualified tax professional. This is a big decision.
Don't risk making a big mistake.
The distribution options on your 401k are governed first by the tax laws and
then by the plan's rules. Some plans don't offer every option that's available
by law.
If Owen really wants the money, he can get it now. Either through a loan or by
taking a distribution. You can take money out of your 401k anytime you want.
It's just a matter of whether you want to pay the penalty.
Withdraw money before age 59 1/2 and you'll pay a 10% early withdrawal penalty.
There's an exception if you leave your company after age 55. Then, a lump sum
distribution is not subject to the penalty. But, it will still be taxed.
On the other end of the calendar, you must begin withdrawing part of the account
at age 70 1/2. The amount will be determined by life expectancy.
Next, let's look at what choices Owen will have when he retires. The decision
will largely be his.
The law allows for five different alternatives for a 401k account at retirement.
The options are: lump-sum distribution, continue the plan, roll the money into
an IRA, take periodic distributions, or use the money to purchase an annuity.
Owen's particular plan will allow for some or all of them.
The fastest way for Owen to get his 'big wad' of money is to take a lump-sum
distribution. He'll get the money quickly. But there are two disadvantages.
First, he'll pay ordinary income taxes on the entire amount withdrawn. Second,
the money will no longer be growing tax-free.
If Owen does take a lump-sum distribution he'll be subject to 20% withholding.
That means the IRS will take 20% of the money distributed now and apply to his
tax bill next April. Owen can thank the "Unemployment Compensation Amendments
Act of 1992" for that idea.