- Can I Cash in on a 401(k) From My Former Employer Without Penalties?
- Does Income Have to Exceed 401(k) Contributions?
- Rules About Borrowing From a Retirement Account
- Tax Implications of Selling a 401(k)
- How to Get Your 401(k) Without Quitting Your Job
- How Much Penalty Do I Pay for Early Withdrawal of My 401(k)?
Your 401k should be the money that gets you through in your retirement years. To encourage people to save this money until then, a 401k has limits on using the money before retirement. In many cases, if you withdraw the money early, you incur a 10 percent penalty fee, in addition to any taxes that you must pay. However, certain situations allow you to withdraw from a 401k without penalty.
As of the time of publication, you can withdraw from a 401k any time after you reach age 59 1/2, which is similar to other types of retirement investment plans. When you reach age 70 1/2, you must begin to withdraw some of the money in your 401k. The minimum amount is calculated based on the amount in your account and the number of years you're expected to live.
You can still take some penalty-free withdrawals before you reach 59 1/2 if you meet certain criteria. For example, if you become disabled and this prevents you from working, you can start taking withdrawals. You must prove that you are actually disabled, which is easy if you are receiving disability payments. You can also take penalty-free withdrawals to pay money you owe in taxes or to pay for unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income.
If you planned well financially, you may be able to retire early and use the money in your retirement accounts. To do this penalty-free, you must plan to take an equal distribution from your account each year for at least five years. For example, if you retire when you're 50, you might consider taking $10,000 out each year until you turn 59 1/2, at which point you're given more flexibility in the amount you withdraw.
Another option for those who need money but don't meet the age requirement is to take out a 401k loan. This loan is penalty-free, but you must make a plan to pay yourself back, including interest. You may lose some money, depending on the current conditions of the stock market, but you will be able to get out of your financial pinch.