It’s always a good idea to get advice from a financial professional before you make major decisions about your retirement savings. Whether you withdraw from the money in your 401(k) early or later in life can greatly impact what happens.
Wait Until You’reYou’re 59½
By the time you reach age 59 ½ (or age 55), you won’t be charged a penalty to take money out of your 401(k) retirement account.
Because withdrawals are taxable and the IRS doesn’t give breaks on taxes, a portion of each distribution should be designated to cover all your income*.
Retirement accounts withdrawals aren’t mandatory until April 1 after you turn 72, when you must take a minimum required amount every year.
Take an Early Withdrawal
Making an emergency withdrawal is not recommended, but doing so might be necessary at some point. That’sThat’s because late withdrawals incur an additional 10% tax on top of ordinary income taxes.
Consider the consequences of a 30-year-old withdrawing even $5,000 from his 401(k).
By withdrawing the money early, such as before the 30-year time frame on the investment return statement begins, and investing instead with an aggressive growth fund that follows an investor’s timeline of growing expectations rather than investments returning a set percentage after several years:
Request a Hardship Withdrawal
You may qualify for a hardship withdrawal and avoid paying the 10% early distribution tax.” ” According to the IRS, you may qualify for a hardship withdrawal to pay for the following:
Some sources of financial hardship include medical expenses, tuition or moving expenses.””
“”However, not all 401(k) plans offer a hardship withdrawal.””
- Medical care for a family member
- Home costs related to the purchase of your principal residence
- Tuition, related educational costs and room and board for up to the next 12 months of post-secondary education for you, your spouse, children, dependents or beneficiary
- Payment to prevent eviction from your home
- Payment for a payment plan
- payment to contest the mortgage on a property
Although withdrawals of 401(k)s are subject to a 10% penalty, income taxes are due on these distributions. The amount withdrawn from a 401(k) is also limited to necessary to satisfy the need. Depending on your health insurance, you might not be able to get the 401(k) money to buy a new boat if your medical bills are that high. Because of this, one possible result is that you’ll have to find enough money somewhere else or prove that you can’t afford it—that is, “”very difficult”” condition.
Take Out a 401(k) Loan.
Another way to access your 401(k) without incurring the early withdrawal penalty is to use a 401(k) loan. Your 401(k) may allow you to take out a 401 (k) loan and forgo the taxes and penalty associated with an early withdrawal. As loans are nice because of the interest, you’ll be able to repay yourself without the interest. Unlike a loan, a 401(k) loan will not show up as debt on your credit report.
Suppose the loan is not repaid on its terms. In that case, your outstanding balance will be considered a distribution, and you’ll be taxed on its income at the same rate as other distributions and would also incur an admonishment for early withdrawal of 10% (or any percentage) interest in addition to your missed payment.
Long-term 401(k) loans cannot exceed 50% of the vested account balance, meaning if your 401(k) has $60,000, they can borrow up to $30,000. They are not taxed as a normal 401(k) contribution is usually deductible.