Can I Take Money Out of My 401k to Withdraw & What Is the Penalty?
You may be able to take money out of your 401k, but the funds are not always easily accessible and there are numerous rules and conditions that must be met in order to avoid taxes and penalties. If you are thinking about taking money out of your 401K, there are a few things that you need to consider to avoid paying unnecessary fees.
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Early Withdrawal Penalties
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A 401K account is intended to be used for retirement at age 59 1/2 or older. Withdrawing the funds early is an option, but understand that there are rules that apply to the withdrawal of your 401K funds. If you withdraw funds from your 401K before you are 59 1/2, you will be subject to a 10 percent penalty and you will have to pay taxes on the amount withdrawn.
Acceptable Reasons for Early Withdrawal
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You can take money out of your 401k without penalty if you are making a hardship withdrawal. There are a number of acceptable reasons you can make an early hardship withdrawal of your 401k, including paying for unexpected medical expenses, saving your home from foreclosure, paying for funeral expenses or funding college tuition costs.
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Early Withdrawal Tax Consequences and Penalties
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Because 401K retirement plans are not intended to be savings accounts, when you withdraw money from your 401K early, you must claim the withdrawal on your tax returns as income for the year.
Early Withdrawal Alternatives
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You can take money out of your 401k and avoid the penalties and tax consequences by getting a 401K loan. A 401K loan is issued by the brokerage firm managing your 401k and is similar a bank loan. A 401K loan lets you utilize funds from your 401K and pay the money back over time with interest. With a 401K loan, you will not be subject to any tax or early withdrawal penalties.
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References
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