A 401(k) loan is designed to pay for retirement expenses, not present-day needs. Because of that, if you’re younger than 59 1/2, you pay a 10 percent penalty for most withdrawals. In certain cases, however, you may be able to withdraw funds earlier than that without being subject to those extra costs.
Withdraw money temporarily without penalty by taking out a loan from your 401(k). Some plans don’t permit them, but if yours does, you’re allowed to borrow up to $50,000 or half your plan’s balance, whichever is smaller. Though you have to pay the money back, you’re doing so by returning the funds to your 401(k), with interest. The downside is that if you leave your job, you’ll have to pay the entire amount back within a specified period to avoid having it treated as an early withdrawal.
The IRS allows withdrawals to pay medical bills that exceed 10 percent of the taxpayer’s adjusted gross income. You don’t have to itemize deductions to take advantage of this, but you do have to take the withdrawal in the same year you incurred the expense. You also can take money from your 401(k) if you’re totally and permanently disabled, but the IRS may ask for proof. If you’re collecting disability payments from Social Security or an insurance policy, that would be a strong indication that the withdrawals are legitimate.
In certain cases, you can access funds early if you’ve left your job – whether you quit or were let go – close to the age you’d usually be able to dip into your 401(k) anyway. If you’ve left your job after age 55, you can withdraw money without penalty. That drops to age 50 for public safety jobs, such as police or firefighters.
Another potential option to access money in your 401(k) without penalty comes courtesy of IRS rule 72(t), which permits early withdrawals based on life expectancy. You have to take a specified amount every year for at least five years or until you turn 59 1/2, whichever is greater. For example, if you’re 51 when you take advantage of rule 72(t), you’ll have to take that specified amount for 8 1/2 years. This isn’t used very often, and won’t generally be attractive to younger workers who would have to take those specified payments for an extended period. You’ll also pay taxes on the money based on your tax bracket.
- Photo Credit Stockbyte/Digital Vision/Getty Images
How to Determine Penalties for 401(k) Early Withdrawals
There are certain instances (like a terminal illness) where you can access your money early without the penalty. ... IRS Penalties for...
Information About Taking Out a 401K Investment
If you participate in an employer-sponsored 401(k) retirement plan, several regulations exist governing how, when and in what manner your money can...
Can I Take All Money From My 401k?
It doesn't matter what age you are, you can take out the money in your 401k plan. All vested assets are yours,...
How to Withdraw 401(k) Money With No Penalty
Withdrawing 401(k) money without penalties requires waiting until the minimum age for taking out money, ... Five, to use your 401K without...
What Is the Minimum Age for 401(k) Withdrawals?
How to Withdraw 401k Money With No Penalty. Many employees encounter the issue of whether to withdraw 401k money to pay for...
Can I Take Money Out of My 401K at the Age of 55?
Can I Take Money Out of My 401K at the Age of 55?. 401k plans are a common mechanism of ... may...
Roth 401(k) Withdrawal Penalties
The IRS assesses a 10 percent early withdrawal penalty on the taxable portion of ... Your beneficiaries can withdraw money from your...
How Much of My 401(k) Can I Withdraw Each Month?
Saving money for retirement is important, but knowing how to tap that money is even more critical. When you are in the...