401(k) Disbursement Calculations

by Michael Keenan

If you are buying a home, are stricken with a financial hardship or are at least 59 1/2 years old, you can take distributions from your 401k plan. You can also roll your 401k into an IRA if you leave the job where the account is held. In the case of hardship distributions, you have to calculate the maximum amount you can withdraw. Nonqualified withdrawals require you to calculate the early withdrawal penalty. For all withdrawals, you have to calculate your income taxes due. When you reach age 70 1/2, you have to calculate your minimum withdrawals.

Income Taxes Due

When you take a distribution from your 401k plan, you have to include it as part as your taxable income and pay regular income taxes on it. To find the amount of the taxes on your 401k plan distribution, multiply your distribution amount by your marginal tax rate. For example, if you fall in the 31 percent income tax bracket and withdraw $8,200, multiply 0.31 by $8,200 to find your income taxes equals $2,542.

Early Withdrawal Penalties

The IRS divides 401k plan distributions into two categories: qualified distributions and nonqualified distributions. Qualified distributions are taken after turning 59 1/2; nonqualified distributions are taken before turning 59 1/2. If you take a nonqualified distribution, the IRS charges a 10 percent early withdrawal tax penalty that adds to your tax liability. In limited circumstances, such as for medical expenses that exceed 7.5 percent of your adjusted gross income or if you retire after turning 55, you can avoid the early withdrawal penalty on a nonqualified distribution.

Maximum Hardship Withdrawal

If your 401k plan allows hardship distributions, the IRS limits the amount you can take out to the amount of the hardship plus the amount necessary to cover any applicable taxes and penalties. For example, if you are eligible for a $5,000 medical hardship distribution and that withdrawal would result in $500 of tax penalties and $1,300 of taxes, add $5,000 plus $500 plus $1,300 to find the maximum withdrawal you would be eligible to take would be $6,800.

Minimum Required Distributions

The IRS requires that you start taking money out of your 401k plan in the year you turn 70 1/2 years old. The amount the IRS requires you to withdraw equals the value of the 401k plan at the end of the prior year divided by your life expectancy. Your life expectancy is determined by the life expectancy tables in the appendix of IRS Publication 590. Failing to take the minimum required distribution results in a 50 percent tax penalty. Like any other 401k plan distribution, the amount counts as taxable income.

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