How to Tap Into 401(k) Without Tax Penalty
Life throws you curve balls sometimes. You may have been saving for years by contributing to an employer-sponsored 401(k) program and watching it grow with employer contributions. Then you hit a financial crisis and that money you've been saving for retirement looks like an awfully attractive way to get out of the situation. However, the Internal Revenue Service doesn't want you to touch that money until retirement and if you do, you may wind up paying penalties.
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Instructions
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How to Tap Into 401(k) Without Tax Penalty
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Wait until you are age 59.5. This is the easiest way to draw on your account. At this age, there is no penalty associated with withdrawing the money. This does not mean the withdrawals are tax free, though. Anytime you withdraw money from your 401(k) permanently, it will be considered income that must be reported on your taxes.
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Take the money out in annual payments. This is called a "substantially equal periodic payments." The IRS allows you to make annual withdrawals for at least five years until you reach age 59.5, whichever is longer. It would allow you to access your money well before retirement, but it would also require you to continue drawing on it.
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Take a loan from the account. You will avoid the early withdrawal penalties and you eventually will repay the money to yourself with interest. You can borrow up to 50 percent of your vested amount up to $50,000. However, you will lose the compounding interest on the money you borrow until the money is back in your retirement account.
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Use the money for school or a new home. The IRS has made allowances for large expenditures that you may incur. You can avoid early withdrawal penalties if you use the money you withdraw for school costs or to purchase a first home--up to $10,000.
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Take a hardship withdrawal. The IRS recognizes certain financial crises may cause you to need your retirement money without penalty. If you need to pay excessive medical expenses, to pay for medical insurance while you're unemployed or become disabled you can access your funds without penalty. However, you can only take up to the amount you have contributed to the account. There are limitations, so consult your tax professional to make sure you qualify to take the hardship withdrawal without incurring a penalty.
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Take early retirement. There is an option with 401(k) plans that allows you to take early retirement as early as age 55 and begin drawing on your account without penalty.
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