A 401(k) plan is designed to help you save money for retirement. At that point you can take regular distributions of your money, typically divided into enough annual payments that you will receive money consistently for the rest of your life. Usually the plan stays in force as long as you have your job, but there are ways to access your money while still with the same employer. This could lead to taxes and penalties under certain circumstances.
1. Wait to dip into your 401(k) until you reach the age of 59 ½, the minimum age required by law for the distribution of your funds without paying a penalty. You do not have to leave your job in order to access your money at that time. You need to be aware that 401(k) funds will be added to your regular income to determine your taxable income for the year, so if you are still working and then you also receive retirement funds, you may end up with a substantial tax bill for the year. Depending on your plan, you may either be able to take a lump sum or annual payments at this point.
2. Take out a loan against your 401(k), if your plan allows it. While this doesn’t actually give you your 401(k) funds, it allows you to use a maximum of half the amount of the money that you have vested in your 401(k), up to $50,000. As long as you repay according to IRS rules, the money is not taxable. You get five years to pay the money back. The payments, including interest, go back into your account. If you leave your job, the loan typically becomes due immediately.
3. Declare a hardship and request the distribution of some or all of your contributed funds. Earnings and employer matching funds are not generally included in the available amount, but certain plans may make exceptions to this. The money will be taxed as part of your income, but you are allowed to take enough money out to cover taxes as well as the pressing financial need. Not all 401(k) plans include a provision for hardship distributions. Check your plan to see what the hardship rules are. The IRS will allow you to take money from your 401(k) if the money is needed to pay large medical bills, to keep you from losing your home to foreclosure or eviction, to pay college tuition or to pay for funeral expenses. You can also take a distribution of up to $10,000 for the purchase of your first home. There are additional circumstances that may allow you to tap into your 401(k) without leaving your job.
- Keep your contributions to your 401(k) realistic, so you are better able to leave your money alone.
- The only way to get money from your 401(k) without depleting your retirement account is by taking a loan. This is also the only method of accessing your funds early that that allows you to replace the entire sum with interest.
- If you deplete your 401(k), you are also keeping that money from working for you, so you lose not only the money you take out but also the money it would have made for you if left in the plan.
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