ABA Family Legal Guide

The Rights of Older Americans

Pensions

401(k) Plans and Simplified Employee Pension Plans

How are retirement benefits paid out of 401(k) plans?

Instead of a pension benefit, upon retirement employees receive distributions from their 401(k) accounts. Your plan may permit the distributions to begin as early as age 59½ without penalty, but the participant cannot defer the start of distributions any later than April 1 of the year following the year in which you reach age 70½.

Also, unlike traditional pension plans, you may be permitted access to the funds in the plan before retirement. For example, if you are an active employee, your plan may allow you to borrow from the plan. Also, your plan may permit you to make a withdrawal on account of hardship, generally from the funds you have contributed. If you make an early withdrawal that is not permitted by the plan, you will be subject to significant tax penalties.

Distributions upon retirement can take the form of periodic payments, installment payments, or even a single distribution of the entire amount in your account. Because deciding on the form of your distribution can have a great effect on both your economic security in retirement and your tax liability, it is a good idea to get professional advice before making this decision.