BusinessHABFidelity 401k: Every individual has a unique financial situation, and no single retirement strategy is universally best for everyone. Still, there are some broad tips or guidance that benefit most investors, especially those looking to make the most of their retirement savings.
One of the golden rules of retirement savings is to always try to prioritize taking the full amount of your employer match. For example, if your employer matches dollar for dollar your first 4% of 401(k) contributions, you should strive to put at least 4% into your 401(k). This strategy maximizes the free money you receive from your employer.
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1. Rules for Withdrawing Money on Fidelity 401k
The distribution rules for 401(k) plans differ from those that apply to individual retirement accounts (IRAs). In either case, an early withdrawal of assets from either type of plan will mean income taxes are due, and, with few exceptions, a 10% tax penalty will be levied on those younger than 59½.
But while an IRA withdrawal doesn’t require a rationale, a triggering event must be satisfied to receive a payout from a 401(k) plan.7 The following are the usual triggering events:
- The employee retires from or leaves the job.
- The employee dies or is disabled.
- The employee reaches age 59½.
- The employee experiences a specific hardship as defined under the plan.
- The plan is terminated.
2. Post-Retirement Rules
The IRS mandates 401(k) account owners to begin what it calls required minimum distributions (RMDs) at age 72 unless that employer still employs the person. This differs from other types of retirement accounts. Even if you’re employed, you have to take the RMD from a traditional IRA, for example.8 Money withdrawn from a 401(k) is usually taxed as ordinary income.
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Fidelity 401k
3. The Rollover Option
Many retirees transfer the balance of their 401(k) plans to a traditional IRA or a Roth IRA. This rollover allows them to escape the limited investment choices that are often present in 401(k) accounts.
If you decide to do a rollover, make sure you do it right. In a direct rollover, the money goes straight from the old account to the new account, and there are no tax implications. In an indirect rollover, the money is sent to you first, and you will owe the full income taxes on the balance in that tax year.11
If your 401(k) plan has employer stock in it, you are eligible to take advantage of the net unrealized appreciation (NUA) rule and receive capital gains treatment on the earnings. That will lower your tax bill significantly.
Fidelity 401k
4. Hardship Distributions
There may come a time when emergencies arise. And you may find that the only place you can turn to meet your immediate financial needs is your retirement plan. While it may not necessarily be the best route, you have the option to take hardship distributions or withdrawals. There are a number of considerations when it comes to this kind of withdrawal:
- There must be a clear and present need to take a hardship distribution. It can also be a voluntary or foreseeable need as long as it is reasonable.
- The amount of the withdrawal must not exceed the need.
- You can’t take any elective distributions for six months after the hardship withdrawal.14
This type of withdrawal is taxable. And if you take one of these, you aren’t expected to pay it back to the account. Full details on hardship distributions are available through the IRS website.
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Fidelity 401k
5. Be Mindful of Contribution Limits
The IRS does not permit contributions in excess of 401(k) annual limits. Should you overcontribute, you are required to then withdraw those excess contributions, triggering potential taxes and penalties. In 2022, the 401(k) contribution limit for both traditional and Roth 401(k)s was $20,500, and the contribution limit in 2023 is $22,500.15 There are also catch-up contributions for individuals 50 years or older.
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Fidelity 401k
6. Try Not To Withdraw Early
Should you withdraw retirement plan funds early, you will be subject to Federal income tax on the withdrawal. In addition, the IRS will impose a 10% penalty on early withdrawals. Finally, withdrawing retirement savings early may stem the compounding effect your investments may experience. Leaving your 401(k) plan as-is for longer maximizes your potential for long-term portfolio growth.
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