Can I Legally Withdraw Early From My 401(k)?
Having access to a 401(k) plan at work can be a valuable tool for funding your retirement. However, situations may arise in which you need to tap your 401(k) fund before retirement. While there is nothing illegal about making early withdrawals, accessing the money can be difficult and, in some cases, costly.
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Identification
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With a 401(k) plan you contribute pre-tax dollars, which allows you to lower your taxable income. You typically have a choice between a variety of investment options offered by your employer, such as mutual funds, money market accounts or even your company's stock. The earnings on your money grow on a tax-deferred basis, meaning you owe no taxes until you begin to make withdrawals. Many employers match the contributions made by their employees up to a certain point.
Penalty-Free Withdrawals
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You can begin receiving distributions from your 401(k) beginning at age 59 1/2 without incurring the typical early withdrawal penalty, which is 10 percent of the withdrawn amount. However, if you're 55 or older and you permanently leave your job, regardless of whether you get a new job, get fired, quit or retire, you can also begin to receive penalty-free distributions. In either situation, you would still need to pay taxes on the amount you withdraw.
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Loan Provisions
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In most cases, you cannot make a straight withdrawal from a 401(k) before age 59 1/2 (or 55, if applicable). However, some companies offer a loan provision under which you can borrow an amount up to $50,000 or half of your vested account balance, whichever is less. You'll receive a low interest rate and you'll have as long as five years to repay the borrowed amount plus interest in full.
Leaving the Company
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Another way you can receive your 401(k) money is if you leave the company before age 55 and do not wish to leave your money in your old company's 401(k). You'll have 60 days to roll the money into your new company's 401(k) plan or an IRA. If you don't complete the transaction within 60 days or decide to keep the money, it is considered an early distribution. The money is still yours but you'll be hit with the 10 percent penalty and be required to pay taxes on the distribution for the tax year in which you receive it.
Hardship Withdrawals
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Your company may permit you to make a withdrawal before age 59 1/2 if it offers a hardship provision. Companies have some latitude when defining what a hardship is, but it generally covers events such as large, unforeseen medical bills, disability or to pay for a down payment on a home or a child's education. You are not required to repay a hardship withdrawal but you'll still incur the 10 percent penalty and current-year taxation.
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