Should You Delay Your 401(k) Payout?

As one of the worst years in the nation's financial history nears an end, many Americans are trying to figure out ways to cope.

Those facing the most urgent issues are individuals at or near retirement age. Many have questions. Here are two:

Question: I've been trying to find out at what age do you have to cash in your 401(k)? I'm hearing age 70 ½, but I cannot find this answer anywhere. I'm still working at age 69 (age 70 in March 2009) and I am still contributing to a 401(k) through my employer. I plan on working as long as I can because I do not have enough money in my 401(k) to retire yet (especially after taking a big loss recently).
--J.M., Sierra Vista, Ariz.

Answer: You may be able to delay taking required distributions if you continue to work into your 70s as planned, but there some things you need to know first.

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In most cases, IRS regulations require retirement savers to begin drawing from their 401(k) accounts, traditional IRAs and other retirement savings plans after reaching age 70, though Roth IRAs are excluded from this requirement.

The reason for the required distributions after age 70 is that after years of extending tax breaks on your retirement savings, Uncle Sam finally wants his share. Otherwise, the wealthy could use traditional IRAs, 401(k) or other retirement savings plans as permanent tax shelters, forever avoiding taxation on income earned over a lifetime.

After age 70 ½, retirement account owners must at least withdraw a minimum amount annually based on an IRS formula. Those withdrawals are then subject to taxation.

The deadline for the first required distribution is April 1 of the calendar year after the year in which you turn 70 ½. For instance, if you turned 70 ½ on June 1, 2008, the deadline for your first required distribution is April 1, 2009.

Fail to take the required distribution by the right date, and the IRS will impose a hefty 50 percent penalty on the amount that was supposed to be withdrawn.

The exception that may apply in your case allows taxpayers who continue to work past age 70 ½ and contribute to their employer's 401(k) plans to hold off on required minimum distributions from the plan, provided the plan allows it. That means if you're still working at 72, 73 or even 74, there may be no mandatory withdrawal.

There are several things to keep in mind before you assume you're free and clear from the minimum distribution requirements.

First, check with your employer or its 401(k) provider to see if your plan allows participants to delay minimum distributions. Individual plans can require participants to begin taking withdrawals after age 70 even if they remain employed with the company.

Second, if you own 5 percent or more of the company that sponsors the 401(k) plan, then no delay is allowed. In such a case, the owner must begin to make withdrawals by the regular deadline.

If you find you are eligible to delay your distributions, then the deadline for your first required minimum withdrawal will be April 1 of the year after you retire from the employer that maintains the 401(k) plan.

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