Q:

What causes a mandatory 401k withdrawal?

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Quick Answer

Owners of 401(k) retirement accounts must initiate mandatory withdrawals known as required minimum distributions by the time they become 70 1/2 years old, reports the Internal Revenue Service. If they continue working, they can postpone required minimum distributions until they retire as long as they don't own 5 percent or more of the business sponsoring the plan. Spouses and other beneficiaries have various options for mandatory withdrawals of 401(k) funds after the account owner dies.

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Full Answer

Although owners must begin required minimum distributions from a 401(k) account by Dec. 31 of the year they turn 70 1/2, they can delay the first distribution until April 1 of the following year, explains the IRS. However, they must make the second withdrawal by Dec. 31 of the same year. Afterwards, they must make a withdrawal by Dec. 31 each year. The owner calculates the amount of each distribution by dividing the account balance as of Dec. 31 of the previous year by his estimated life expectancy according to an IRS table. The penalty for not taking required minimum distributions on time is a 50 percent tax on the amount that should have been distributed.

When a 401(k) account owner dies, spouses who are sole beneficiaries can take over the retirement plan and base required minimum distributions on their own age, base the required minimum distributions on their dead spouse's age, or withdraw the entire amount in the account within five years after the account owner dies, as explained by the IRS. Beneficiaries who are not spouses can withdraw the entire amount within five years or initiate required minimum distributions using a different IRS table.

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