Because 401k plans are designed to encourage savings, it is difficult to take money out of a 401k before you retire. But there are ways to make it happen. Unfortunately, some of those methods incur penalties along with the taxes you must pay on the withdrawals. Take the time to review all of your options and think about the potential disadvantages of tapping your 401k plan early.
The minimum age to make substantial penalty-free withdrawals from your 401k is 59 1/2 years old. This is the defined age of retirement, though many people retire later than this. You are required to begin taking distributions when you turn 70 1/2. At this point, you can withdraw a monthly or yearly amount as needed.
Substantially Equal Payments
If you want to retire before you turn 59 1/2 and still use your 401k to cover your costs, you can begin to take what's called "substantially equal payments." This is an amount that's determined based on your life expectancy and the amount of money that you have in your account. There is no age limit for substantially equal payments, but doing this while you are still young can quickly deplete your funds, as a yearly withdrawal means that you won't be earning interest. Once you've decided to take these payments, you cannot change the payment amount for five years.
Getting a Loan
At any age, you can take a loan from your 401k account. You will have to repay the loan, along with interest, over the next five years or if you leave the company you currently work for, whichever comes first. Though you will pay yourself interest, you stand to lose money because the full amount is not invested in the plan during that time. If you fail to pay by the time that the money is due, you'll have to pay a 10 percent penalty and taxes.
Paying the Penalty
If you can prove that you are having financial difficulties, you may be eligible to take a "hardship withdrawal" from the money. This only applies in cases where you are paying medical, funeral or college expenses, or you want to use the money to avoid foreclosure or make a down payment on a home. Taking out this money incurs a 10 percent penalty and you have to pay taxes on the money. Furthermore, you cannot put this money back into your 401k account, since it is not a loan.