Editing 401(k) (section)

==Withdrawal of funds==
Generally, a 401(k) participant may begin to withdraw money from his or her plan after reaching the age of {{frac|59|1|2}} without penalty. The Internal Revenue Code imposes severe restrictions on withdrawals of tax-deferred or Roth contributions while a person remains in service with the company and is under the age of {{frac|59|1|2}}. Any withdrawal that is permitted before the age of {{frac|59|1|2}} is subject to an [[excise tax]] equal to ten percent of the amount distributed (on top of the ordinary income tax that has to be paid), including withdrawals to pay expenses due to a hardship, except to the extent the distribution does not exceed the amount allowable as a deduction under Internal Revenue Code section 213 to the employee for amounts paid during the taxable year for medical care (determined without regard to whether the employee itemizes deductions for such taxable year). Amounts withdrawn are subject to ordinary income taxes to the participant.

The Internal Revenue Code generally defines a hardship as any of the following.<ref>Smith, Allen. "[https://www.shrm.org/ResourcesAndTools/legal-and-compliance/employment-law/Pages/IRS-hardship-withdrawals.aspx IRS: Self-Certification Permitted for Hardship Withdrawals from Retirement Accounts]". ''Society for Human Resource Professionals''. April 3, 2017.</ref>

* Unreimbursed medical expenses for the participant, the participant's spouse, or the participant's dependent.
* Purchase of principal residence for the participant.
* Payment of college tuition and related educational costs such as room and board for the next 12 months for the participant, the participant's spouse or dependents, or children who are no longer dependents.
* Payments necessary to prevent foreclosure or eviction from the participant's principal residence.
* Funeral and burial expenses.
* Repairs to damage of participant's principal residence.

Some employers may disallow one, several, or all of the previous hardship causes. To maintain the [[tax advantage]] for income deferred into a 401(k), the law stipulates the restriction that unless an exception applies, money must be kept in the plan or an equivalent tax deferred plan until the employee reaches {{frac|59|1|2}} years of age. Money that is withdrawn prior to the age of {{frac|59|1|2}} typically incurs a 10% penalty tax unless a further exception applies.<ref>"[https://www.irs.gov/pub/irs-pdf/p575.pdf Publication 575: Pension and Annuity Income]". ''Internal Revenue Service''. 2007.</ref> This penalty is on top of the "ordinary income" tax that has to be paid on such a withdrawal. The exceptions to the 10% penalty include: the employee's death, the employee's total and permanent disability, separation from service in or after the year the employee reached age 55, [[substantially equal periodic payments]] under section 72(t), a [[qualified domestic relations order]], and for deductible medical expenses (exceeding the 7.5% floor). This does not apply to the similar [[457 plan]].

As a response to the [[COVID-19 pandemic]], the [[CARES Act]] allowed people to withdraw funds before the age of {{frac|59|1|2}} up to $100,000 without the 10% penalty due<ref>{{Cite web|last1=Ortiz|first1=Hector|last2=Scheithe –|first2=Erin|title=Considering an early retirement withdrawal? CARES Act rules and what you should know.|url=https://www.consumerfinance.gov/about-us/blog/cares-act-early-retirement-withdrawal/|access-date=22 July 2020|website=Consumer Financial Protection Bureau|date=30 June 2020 |language=en}}</ref><ref>{{Cite web|last=Gonzalez|first=Julio|date=21 July 2020|title=Top Tax Highlights of the Day – July 20th, 2020 – Need Cash? Don't Forget Your 401K|url=http://juliogonzalez.com/podcast/top-tax-highlights-of-the-day-july-20th-2020-need-cash-dont-forget-your-401k/|access-date=22 July 2020|website=Julio Gonzalez|language=en-US}}</ref> for 2020.

===Loans===
Many plans also allow participants to take [[loan]]s from their 401(k). The "[[interest]]" on the loan is paid not to the financial institution, but is instead paid into the 401(k) plan itself, essentially becoming additional after-tax contributions to the 401(k). The movement of the principal portion of the loan is tax-neutral as long as it is properly paid back. However, the interest portion of the loan repayments are made with after-tax funds but do not increase the after-tax basis in the 401(k). Therefore, upon distribution/conversion of those funds, the owner will have to pay taxes on (only) the interest funds a second time.<ref>Guerra, Tony. "[http://homeguides.sfgate.com/can-use-401k-funds-purchasing-second-home-tax-penalties-48576.html Can You Use Your 401(k) Funds for Purchasing a Second Home Without Tax Penalties?]" ''Demand Media''. Retrieved on January 29, 2014.</ref>

The loan principal is not taxable income nor subject to the 10% penalty as long as it is paid back in accordance with section 72(p) of the Internal Revenue Code.<ref>{{USC|26|72}}(p)</ref> This section requires, among other things, that the loan is for a term no longer than 5 years (except for the purchase of a primary residence), that a "reasonable" rate of interest be charged, and that substantially equal payments (with payments made at least every calendar quarter) be made over the life of the loan. Employers, of course, have the option to make their plan's loan provisions more restrictive. When an employee does not make payments in accordance with the plan or IRS regulations, the outstanding loan balance will be declared in "default". A defaulted loan, and possibly accrued interest on the loan balance, becomes a taxable distribution to the employee in the year of default with all the same tax penalties and implications of a withdrawal.

===Required minimum distributions (RMD)===
{{Main|Required minimum distribution}}
Account owners must begin making distributions from their accounts by April 1 of the calendar year after turning age {{frac|70|1|2}} (72 for individuals who turn age {{frac|70|1|2}} after December 31, 2019)<ref>"[https://congress.gov/116/bills/hr1865/BILLS-116hr1865enr.pdf Consolidated Appropriations Act, 2020: Section 114]". ''United States Congress''. 20 December 2019.</ref> or April 1 of the calendar year after retiring, whichever is later.<ref>"[https://www.law.cornell.edu/uscode/text/26/401#a IRC Section 401(a)(9)(C)(i)(I)]". ''via Cornell University Law School''. Retrieved 16 December 2019.</ref> The amount of distributions is based on life expectancy according to the relevant factors from the appropriate IRS tables.<ref>"[https://www.irs.gov/publications/p590b#en_US_2017_publink1000230772 Publication 590: Individual Retirement Arrangements (IRAs), Additional Material]". ''Internal Revenue Service''.</ref>

The required minimum distribution is ''not'' required for a particular calendar year if the account owner is employed by the employer during the entire calendar year ''and'' the account owner does not own more than 5% of the employer's business at any point during the calendar year.{{efn|name=accountowner|For these purposes, a person's direct ownership must be added to the ownership by the person's spouse, children, grandchildren, or parents, or by the person's partnerships, estates, trusts, and other corporations.<ref>"[https://www.law.cornell.edu/uscode/text/26/318#a_2 IRC Section 318(a)(2)]". ''via Cornell University Law School''. Retrieved 16 December 2019.</ref><ref>Kitces, Michael (18 July 2018). "[https://www.kitces.com/blog/still-working-exception-delay-rmd-401k-required-beginning-date-5-percent-owner/ Maximizing The “Still-Working” Exception To Delay RMDs From A 401(k) Plan]". ''Kitces.com''. Retrieved 16 December 2019.</ref>}}<ref>"[https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds Retirement Plan and IRA Required Minimum Distributions FAQs (Search "actually retire")]". ''Internal Revenue Service''.</ref><ref>"[https://www.law.cornell.edu/uscode/text/26/401#a IRC Section 401(a)(9)(C)(i)(II)]". ''via Cornell University Law School''. Retrieved 16 December 2019.</ref> Required minimum distributions apply to both traditional contributions and Roth contributions to a 401(k) plan.

A person who is required to make a required minimum distribution, but does not do so, is subject to a penalty of 50% of the amount that should have been distributed.

In response to the [[Great Recession in the United States|United States economic crisis of 2007–2009]], [[United States Congress|Congress]] suspended the [[IRA Required Minimum Distributions|RMD]] requirement for 2009.<ref>"[https://www.irs.gov/pub/irs-drop/n-09-09.pdf Notice 2009-9]". ''Internal Revenue Service''. 2008.</ref><ref>"[https://www.congress.gov/110/plaws/publ458/PLAW-110publ458.pdf Worker, Retiree, and Employer Recovery Act of 2008: Section 201]". ''United States Congress''. December 23, 2008.</ref> It was suspended again in 2020 due to the [[COVID-19 pandemic in the United States|COVID-19 pandemic]].<ref>{{Cite web |title=IRS: Seniors, retirees not required to take distributions from retirement accounts this year under new law {{!}} Internal Revenue Service |url=https://www.irs.gov/newsroom/irs-seniors-retirees-not-required-to-take-distributions-from-retirement-accounts-this-year-under-new-law |access-date=20 March 2023 |website=www.irs.gov |language=en}}</ref>

===Required distributions for some former employees===
A 401(k) plan may have a provision in its plan documents to close the account of former employees who have low account balances. Almost 90% of 401(k) plans have such a provision.<ref>Donhardt, Tracy. "[https://books.google.com/books?id=v86MDwAAQBAJ&pg=PP1]." ''Indianapolis Business Journal''. September 19, 2005.</ref> As of March 2005, a 401(k) plan may require the closing of a former employee's account if and only if the former employee's account has less than $1,000 of vested assets.

When a former employee's account is closed, the former employee can either roll over the funds to an [[individual retirement account]], roll over the funds to another 401(k) plan, or receive a cash distribution, less required income taxes and possibly a penalty for a cash withdrawal before the age of {{frac|59|1|2}}.