All You Need to Know About Dividend Withdrawals From 401k

Wednesday, June 19, 2019, 6:00 AM | Leave Comment

Are you confused about the pros and cons of withdrawing dividends from your 401k? Do you know about the type of tax implications on the various withdrawal options for dividends from self-directed IRA?

This article will give you a clear picture about what exactly are dividends and what are the various withdrawal options and the related tax implications for your 401k or self-directed IRA.

Dividends are payouts that some companies make to the shareholders that reflect the company’s earnings. These are often paid out every three months and give the stockholders a steady return regardless of the ups and downs of the stock price.

Well- established companies pay dividends generally. However, dividends are not guaranteed and hence a company can stop paying them at any time.

Now let’s understand the various withdrawal options for dividend incomes and the related tax implications:

  1. Withdrawing When You Retire

    Since the 401k is structured as a retirement plan, when you earn dividend income on this account it is supposed to be kept in your 401k plan until you retire. In case you stop working, you can start making retirement withdrawals once you turn 55. But if you keep working beyond 55, you cannot make retirement withdrawals until the age of 591/2.

    Hence in case you withdraw your dividend income when you retire, that withdrawal will be taxed as an ordinary income. Also, keep in mind that 401k only delay taxes on the retirement gains and it isn’t a tax-free account.

  2. Withdrawing Early

    If you are planning to withdraw your dividend income before you retire, it will be accounted as an early withdrawal. Before withdrawing early, the very first thing you need to do is to check with your employer whether the 401k plan allows early withdrawal or not. This is because not all retirement plans offered by the employers permit early retirement.

    In case the retirement plan allows you to withdraw early, the entire withdrawal will be taxed as ordinary income. But, you will also owe an extra 10% early withdrawal penalty on the entire amount withdrawn. This penalty makes it very costly to withdraw your dividend income early, i.e. before retirement.

  3. Withdrawing as Loans

    Some 401k plans also allow you to withdraw your dividend income as loans on your account balance. So if your plan allows loans, you can choose to borrow half of your account balance, the maximum being $ 50,000. So even if you won’t owe income tax on this loan, you will still need to pay it back with interest into your 401(k). If you don’t pay it’ll be considered as an early withdrawal and then you will have to pay taxes plus the 10% penalty.

If you need to learn more about the withdrawal of dividend income, talk to an experienced professional who deals with 401k and self-directed IRA investments. Of course, reinvesting dividends is a smart way to keep your money growing as quickly as possible. But in case you need to withdraw it, consider the options listed above or seek professional help.

Author Bio

Rick PendykoskiRick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at rick@sdretirementplans.com.

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