How To Withdraw Money From A 401(k) (And The Best Age To Actually Do So)

With any luck, you've been steadily contributing to your 401(k) account in preparation for eventual retirement. That includes participating in the remarkable stock market performance of the past 15 years and particularly, post-Covid. For the uninitiated, 401(k) rules started to gel in the early 1980s and one tenet is that contributions to this type of retirement account are deducted from your pre-tax income and thereby tax-free. Better still, your employee might be willing to match your contribution dollar-for-dollar up to a certain point as a perk. 

Once an account is funded, investors can choose from individual stocks, ETFs, and more conservative fixed income alternatives like bonds and money market funds to grow their nest egg. Recently, some 401(k) administrators have even begun allowing investment in cryptocurrency. 

With prudent budgeting and healthy money habits, you hopefully won't need to touch your 401(k) until it's actually time to enter retirement. However, what exactly is the process of accessing the funds in your 401(k) account? Additionally, is there a particular age when it's most advantageous to start drawing down your retirement investments? The former question is simple while the latter, not so much.

With a certain few exceptions, the minimum age that you can withdraw from your 401(k) account without penalty is 59 1/2 years old. That said, it's always a good idea to wait and let your investments continue to grow, assuming that you can afford to do so. If you're still working into your 60s, have a healthy savings account, or other sources of income like a pension or social security, it's possible to delay touching your 401(k) until age 73. 

Indeed, on April 1 in the year after which you turn 73, you'll be required to withdraw a certain amount from your 401(k) each year, defined as a required minimum distribution, or RMD. RMDs vary on a personal basis and are calculated by dividing the total account balance by your remaining distribution period. That is, how much longer the IRS expects you to live and continue withdrawing from the account. Although investors are able to contribute to their 401(k)s tax-free, withdrawals from regular (non-Roth) 401(k) accounts are treated as earned income and taxed accordingly. 

It's best to avoid making withdrawals before the age of 59 1/2, but if there's no other choice, you'll be hit with a 10% early withdrawal penalty in addition to paying regular income tax on the withdrawn amount. There are certain instances in which early withdrawals are permitted without penalty, like adopting a child or being involved in a natural disaster. Even so, reducing your 401(k) account holdings too early can negatively affect your future financial goals.

Once you've decided to make a withdrawal from your 410(k), either optionally or required, contact your plan's administrator or visit your online account portal to initiate the transfer. That is, assuming that you have free cash or cash equivalents — more on that in a minute.

Typically, withdrawals take place via automated clearing house (ACH) transfer into your checking or savings account. However, you can opt for a faster method via wire transfer or even an old fashioned paper check. Do note that charges may apply for withdrawal methods other than ACH transfer. Withdrawals can be a one-time affair or you may opt to receive a regular monthly payment. For example, your annual RMD divided into 12 equal payments, one per month. 

Where 401(k) withdrawals get complicated is what happens if your account is fully invested. For instance, if the funds in your account are completely tied up in stocks, bonds, mutual funds, etc., you'll need to sell part or all of a position in order to free up cash for your withdrawal. Obviously, if any funds are invested in a short-term money market account, selling part of that position will be a simple decision. But if you need to start selling other types of investments, some soul searching will be required to decide which sectors of your portfolio to sell in order to fund the necessary withdrawal. In this predicament a carefully chosen financial advisor can be an invaluable asset to help you decide.