Income you contribute to a 401(k) plan is tax exempt when earned, but is taxed when withdrawn. Note that for a Roth 401(k), the reverse is true. In either case, 401(k) money isn’t taxed when it sits in your account. The age of 59 1/2 is when you can begin taking money out of your 401(k) without financial penalty (but there are exceptions). If you absolutely need the money early, it’s better to borrow than withdraw. Outside of that, it’s recommended that, for tax purposes, you wait even longer than 59 1/2 to start withdrawing. There’s also a tactic called tax-loss harvesting that can reduce your 401(k) tax bill during retirement.
- Using a 401(k), whether traditional or Roth, allows you to lessen the tax burden on your income as you save for retirement.
- Withdrawing 401(k)s too early could incur penalties, but waiting for the appropriate age can have tax-free withdrawals with Roth or pay taxes with a traditional 401(k) the first year.
- If at all possible delay withdrawing your 401(k), know what is available when withdrawing, and talk with tax experts on how to best handle manage your 401(k).
“Wait as long as you can to take money out of your account. Withdrawals are what can trigger taxes.”