How Can I Get Money From a 401 Retirement Plan Without Paying a Twenty Percent Penalty?

You can withdraw money from a 401 retirement plan without facing the 10 percent penalty.

Sometimes life's little surprises can leave you in a financial bind. And when money is short, people become creative about where they can find new sources of funds. One place some people have a substantial amount of wealth is their 401 retirement plan. The money is earmarked for retirement, and if withdrawn prematurely it is subject to a 20 percent withholding. Ten percent is paid as a penalty to the government while another 10 percent is set aside to cover the taxes you might owe. However, there are some ways you can withdraw money and avoid the 20 percent withholding.

Instructions

1. Wait till you reach the withdrawal age to take the money out. Money can be withdrawn from your 401 retirement plan without penalty starting at age 59 1/2. By age 70 it is required that you start taking payments from the plan.

2. Get a 401(k) retirement plan loan. A loan may be taken from your 401(k) for up to 50 percent of the account value, capped at $50,000. Repayment of this loan is automatically deducted from your paycheck in equal payments over the next 60 months. Withdrawals for home loans allow for longer repayment terms. You do not need to specify what the loan is for. You will pay an interest rate equal to prime plus 1 percent. Ask your employer for the withdrawal form, and after you fill it out you will have your money in a few days.

3. Get your 401(k) money from a former employer. You are allowed to request this money in the form of a check. You then have 60 days to deposit it in a new 401(k) or retirement plan account without incurring the 20 percent penalty.

4. Apply for a hardship withdrawal. These are reserved for extreme financial circumstances: total disability, medical expenses that exceed 7.5 percent of your gross income, a job loss when you are between age 55 and 59 1/2, a court order requiring you to pay a spouse or child. You can also invoke hardship if you are over 55 and have begun to withdraw money in equal installments over your life expectancy. In these cases, you must prove that you have no other assets from which to draw on to avoid the withholding and the penalty. Be sure to keep your records, because after providing proof to the 401(k) provider, you may to provide it again on your tax return.

Tips & Warnings

• Contact the plan administrator to determine if your particular plan offers hardship loans. The plan may also allow a "self-certification" hardship loan. In this instance, they allow you to withdraw the money without penalty because you have "self-certified" your hardship. However, you are then barred from contributing to the plan for six months.

References

• IRS: Retirement Topics: Tax on Early Distributions
• Research 401k: Can You Withdraw Money on from Your 401k Account as a Loan
• 401(k) Help Center: Hardship Withdrawals Give Access to Your 401(k) Money, But at a Cost