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Question:


At what age will I be able to access the money in my 401(k) and IRA accounts? Is there a set age across the board?
-ReadyToSpend


Answer:


You can make a withdrawal any time you want – it’s your money – but the tax consequences are generally more favorable as you get older. For both types of account, withdrawals are taxed as ordinary income by the IRS and by your state if it has an income tax, no matter how old you are. If you’re younger than 59 and a half years old, there is also a 10 percent penalty that the IRS assesses on the amount withdrawn. Waiting until you’re older and have retired before raiding your account can have another tax benefit – your income will probably be lower and so your top tax bracket is likely to be lower too.
 
There are circumstances in which the IRS will allow younger savers to get their hands on their 401(k) assets without paying the penalty, but you probably won’t like some of them. Examples include for total disability, when there are medical expenses exceeding 7.5 percent of adjusted gross income or to pay court-ordered alimony or child support. Penalty-free withdrawals are also permitted when buying a principal residence or paying tuition or other education expenses. There’s one big catch: It’s up to employers whether they want to grant withdrawals under these circumstances.
 
IRA holders can generally make the same penalty-free withdrawals without asking anyone’s permission, as the accounts are not tied to a particular employer. There’s one break, though, that you can get with a 401(k) and not with an IRA. If you leave your job, you won’t have to pay the penalty if you decide to cash out your 401(k) rather than roll it over into a new plan, no matter what you want to use the money for, as long as you leave in or after the year in which you turn 55. Another option with a 401(k) that isn’t available with an IRA is to borrow from the assets in your account. There are various rules and restrictions involved in this, and again it’s up to your employer whether to allow the loans.
-Conrad de Aenlle



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