401(k)
What Is a 401(k)
A 401(k) is a tax-free retirement savings account that many employers offer to employees as an employee benefit. These accounts allow employees to deposit pre-tax income into a savings account that can only be used once an employee has reached the age of retirement. Many employers choose to contribute to these plans depending on the employee’s contributions.
When Can Employees Withdraw From Their 401(k)?
The IRS requires employees to be at least 59.5 years old (55 years old if you leave your employer) to withdraw their 401(k) penalty-free funds. This ensures that employees use these tax-free accounts for retirement. If an individual chooses to withdraw from a 401(k) before they reach the age of 59.5 years, they will be responsible for paying:
- Federal income tax
- State income tax (if applicable)
- 10% penalty
Of course, there are exceptions. Some 401(k) plans allow employees to make 401(k) hardship withdrawals. Learn more.
Related Terms: Employee Benefits