Making a lump-sum withdrawal means taking your accumulated balance out of your 401(k) account. You can roll over the money into an individual retirement account (IRA) within 60 days to preserve its tax-deferred status. Or you can invest or spend it as you wish by putting the check or wire transfer into a checking, savings, or investment account.
If you don’t roll over the money, you’ll owe income tax on the total value of your pretax contributions, any matching amounts your employer added, and any earnings that have accumulated. You may also owe a 10% early withdrawal penalty if you are younger than 59½. In fact, your employer must withhold 20% of your account value to prepay at least part of what you owe.
If you do roll over your withdrawal or if your tax bill is less than the amount that was withheld, you’ll get a refund of the amount your employer withheld. But, depending on the timing of your withdrawal, and when you file your return, that refund could take more than a year. What is equally likely is that the size of your withdrawal will put you in the highest tax bracket, which could mean you’ll owe an additional amount on April 15. You’ll also owe tax annually on any earnings your lump sum provides.
Also, keep in mind that the money you withdraw will no longer be there as future retirement income and you may have to work longer, or increase the amount you save, to ensure that you have enough savings for retirement. That’s why you may want to think carefully about this approach.
| The Stock Exception When you retire or roll over your account, you may want to take a lump-sum withdrawal of company stock from your 401(k) if it has increased in value. You can postpone taxes until you sell, preserving the tax advantages of your retirement account. And any gains when you eventually do sell qualify as long-term capital gains, which are taxed at a lower rate. But you may want to get professional advice first so you can weigh the potential long-term advantages against possible drawbacks. |
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