Yes, it’s your pot of cash sitting in a 401(k) account waiting for retirement.

You’re supposed to resist the temptation to withdraw the money. But you need it now.

Here are a few ways to get your hands on those funds without suffering a 10 percent penalty on top of income taxes.

Congress created 401(k) retirement plans in 1978. They are governed by the Employee Retirement Income Security Act of 1974 in addition to the tax code. Many companies adopted the plan as a way to help millions of employees save for retirement and supplement Social Security checks. Beyond the 401(k), variations include the SIMPLE 401(k) and safe-harbor 401(k).

Qualified plans such as the 401(k) are defined-contribution plans.

In some companies, all contributions come from employees. Some companies supplement their employees’ contributions with matching funds.

In 2017, the maximum amount of compensation that can be deferred into a 401(k) plan is $18,000 for employees younger than 50. Those who will turn 50 or older by the end of the year can make catch-up contributions to a total of $24,000.

The maximum joint employee/employer contribution limit for 2017 is $54,000 for employees younger than 50 and $59,000 at 50 and older.

Funds in a 401(k) account can be invested in stocks, bonds and other instruments.

Normally, withdrawal is permitted without a 10 percent penalty once the account owner turns age 59½. Required minimum distributions must start by April 1 of the year following the year that the owner turns age 70½.

The Financial Industry Regulatory Authority provides a free calculator to determine the amount that must be withdrawn depending on the account balance and the age of the owner. At any age, distributions count as ordinary income and are taxed accordingly.

North Bay Business Journal met with Alicia Cerruti, CPA and senior tax manager in Pisenti & Brinker’s Petaluma office, where she has worked for a dozen years. Cerruti guides businesses and individuals with high net worth, as well as nonprofits, through the sometimes tricky realm of taxes.

Taking money out of a 401(k) plan before age 59½ is not easy without suffering the 10 percent penalty. The funds, after all, are intended to go toward retirement. “There are not a lot of choices” for withdrawal. “That’s the point of it,” Cerruti said.

As a result, “there are very limited scenarios in which you can avoid that penalty” of 10 percent. You are always going to have the tax.”

Withdrawals before age 59½ from a 401(k) plan can be done typically in these circumstances, according to Cerruti.


If the 401(k) owner dies, heirs can take the money without the 10 percent penalty.


Total and permanent disability qualifies the 401(k) owner to take distributions without penalty. “Your physical and mental state prevents you from being able to carry on a normal line of work,” she said, such as heart or breathing conditions.

Age 55

If the 401(k) owner leaves employment after age 55, withdrawal without penalty may be possible. “You have to look at how your plan is written,” she said. “If you work through that period when you turn 55 and then separate from the employment, you can probably get an exception.”

Age 50 for some workers

Police, firefighters and EMT personnel may be able to take 401(k) distributions without penalty if they retire after age 50.

Equal periodic payments

You agree to take a series of payments of the same amount from the 401(k) plan until you hit 59½ using the required-minimum distribution method, a fixed-amortization formula or a fixed-annuity factor from the IRS. “If the payment changes, you will have to pay the penalty after the fact,” Cerruti said, “if you don’t design the distributions to be equal, and one period you take too much.”

The difference between payments must “be substantial,” she said, not a trivial amount.

“Someone had a payment plan then decided to draw another $22,000 out for education,” she said, and might have been subject to the penalty. “It was substantially more than the original payment plan,” she said, but because the money was used for a purpose that has its own exception, education, no penalty was assessed by the IRS (see below).

The payments must be periodic, and the period can be monthly, quarterly or annually, according to Cerruti. “As long as you set up your period, you are probably fine,” she said.

There are a few other ways to get money out of a 401(k) plan without penalty.

If you are a new employee whose employer enrolled you automatically and you don’t want the plan, you can usually get the money out that went in under the employer’s automatic setup.

Military reserve

If you are called to active military service as a reservist and serve for at least six months, you can likely withdraw money during the service with no penalty.

When you move money in a 401(k) plan into a Roth IRA or Roth 401(k), you pay tax on the distribution but no 10 percent penalty.

Divorce settlement

If a court orders the split of a 401(k) in a divorce settlement, the part of the assets that go to a former spouse is not penalized. “It’s called a qualified-domestic-relations order,” Cerruti said.

Higher education

In some circumstances, money can be withdrawn from a 401(k) plan without penalty if it is used for higher education, Cerruti said. “If you go back to school and you need to draw some funds,” she said, for “tuition, supplies, books,” but not for shelter, food or living expenses. However, “if you could make payments substantially equal, you could probably live off that,” Cerruti said.

“You have to reduce it if there are scholarships,” she said. “You can’t draw $50,000 then get scholarships and play with the excess.”

Medical expenses

Money can be withdrawn without penalty for hardship cases with high medical expenses in a year, Cerruti said, but the amounts have to exceed 7.5 percent of adjusted gross income.

If a 401(k) owner is forced to remove funds and must pay penalty plus tax, Cerruti said, the amount withdrawn can be planned to place the income in the lowest tax bracket possible. In 2017, the brackets for taxable income are:

No tax for income up to the standard deduction in 2017 of $6,350 for single taxpayers and married couples filing separately.

For married couples, the standard deduction is $12,700. Heads of households have standard deduction of $9,300. The personal exemption amount in 2017 is $4,050 then phases out as the taxpayer’s income hits $261,500 for single taxpayers and $313,800 for married couples filing jointly.

Combining the standard deduction and personal exemption for a single taxpayer, up to $13,350 could be withdrawn in a year under any circumstances with no income tax if there is no other source of income, paying the 10 percent penalty.

Then taxes kick in on taxable income in these brackets for 2017:

10 percent for amounts from $0 to $9,325;

15 percent for amounts $9,325 to $37,950;

25 percent for amounts $37,950 to $91,900;

28 percent for amounts between $91,900 and $191,650;

33 percent for amounts $191,650 to $416.700;

35 percent for amounts $416,700 to $418,400;

39.6 percent for amounts $418,400 and above.

“If you can stay in a lower bracket,” Cerruti said, “you can reduce taxes. It depends on how much you can control your income. Owners of businesses might have more give there and be able to control” income. Employees have less flexibility and are simply issued a W-2 by the employer.

“We have so many different retirement plans,” Cerruti said, including the (401(k), Roth 401(k), Roth, IRA, 403(b) (tax-sheltered annuity typical with nonprofits), Owner-K and SEP-IRA.

“You have so many choices based on what you want to accomplish in retirement. How can you put away the most money, protect yourself, plan for retirement that leaves you comfortable?”

In some circumstances, the owner of a 401(k) plan can arrange a loan from the account instead of making a withdrawal.

Usually the limit is the lesser amount of 50 percent of the funds or $50,000. The funds must be repaid to restore the 401(k) plan to nearly its former state, as if the loan had not taken place. Typically the repayment is over five years.

She typically deals with early withdrawal from 401(k) plans after the fact, when a client took the money without much planning.

“I have had people call me when they messed up with their IRA,” Cerruti said, using the money, for example, for the down payment on a house. In that instance, an exception allows withdrawal without penalty (up to $10,000 for first-time home purchase without 10 percent penalty). “That one worked out by fluke,” she said. If that withdrawal had been from a 401(k), the penalty would have been due.

“Home purchase does not work there,” she said, as an allowed withdrawal.

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at: james.dunn@busjrnl.com or 707-521-4257.