Account holders pay only regular income tax on money withdrawn from a 401(k) after age 59 1/2, reports About.com. Early withdrawals are subject to penalty tax unless they qualify as exceptions. To avoid penalties, account holders must initiate required minimum distributions by age 70 1/2 unless they continue to work.Continue Reading
Funds withdrawn from 401(k) plans before the account holder is 59 1/2 are subject to a 10 percent penalty tax in addition to income tax, according to the IRS. However, account holders who retire at age 55 or over can take penalty-free distributions. The penalty is also waived if the account holder becomes permanently disabled, has medical bills totalling over 10 percent of adjusted gross income, must satisfy an IRS levy of the plan or is called from reserve to active military duty for 180 days or more. Account holders can also avoid the penalty tax by arranging for substantially equal periodic payments based on their life expectancy.
Account holders must usually initiate required minimum distributions from 401(k) plans by April 1 of the year after they turn 70 1/2, as reported by Bankrate. However, if they continue to work, they can delay distributions until April 1 of the year after they retire. Account holders are responsible for calculating the correct yearly distribution amount by figuring the account balance divided by their life expectancy according to an IRS table. Failure to take a required distribution results in a 50 percent penalty tax on the amount that should have been withdrawn.Learn more about Financial Planning