401k Withdrawal: Having Access to your Future
Having access to savings in your 401(k) can be important. Here are
some options when it comes to 401k withdrawal.
Since the inception of 401(k) plans in 1980, many companies have offered defined contribution plans as
a benefit to their employees. In the process, many Americans have used 401(k) plans to save for
retirement with pretax dollars and employer match funds.
In an emergency, you may need to tap those funds, but getting money out of your company’s 401(k) plan
can be especially tricky before you reach the official distribution age of 59 ½. A financial professional
can help you determine which of the many withdrawal options is most suitable for your situation.
The three most common ways to access 401(k) funds are hardship withdrawals,
non-hardship withdrawals and loans.
Hardship 401k Withdrawals
While you are employed by the company that offers a 401(k), you usually have
an opportunity to access savings under certain hardship conditions. The
drawback however, is that qualifying for this provision can be difficult. Just as
the IRS has its list of qualifying financial hardships (medical expenses or
disability), individual plans often do as well. That means you must qualify under
both sets of rules, which may be more difficult.
Another drawback of an 401k hardship withdrawal before age 59 ½, is the 10%
penalty on whatever you’ve withdrawn. The withdrawal is also taxed as income.
Taxes and penalties can make a hardship withdrawal expensive.
Not every plan allows non-hardship withdrawals. If yours does, you have an
opportunity to take money out of your account and redistribute it as you see fit.
Generally the best bet is to roll the amount into an IRA. That way you avoid taxes,
and you have a larger range of investment options, usually with lower
administrative fees. Rollovers made directly to the owner of the 401(k) must be
reinvested in a qualified plan within 60 days or be faced with a 10% penalty.
If you’re in a bind, a 401k loan may be your only remaining option. A loan from your
401(k) allows you to borrow against your savings. Some use restrictions similar
to those for hardship withdrawals. The loan must be paid back, usually within
five years, and loans cannot be rolled over into an IRA. However, if you leave a
company and still have an outstanding 401(k) loan, you’re oftentimes required
to pay it back in a short amount of time, usually one to two months.
Always consult with a professional before making an early 401(k) withdrawal.
The tax consequences and the impact on your future retirement savings can be serious. To be sure
you're making the right choice go over all your options, and pay close attention to the rules and
regulations of your individual plan. Just like the plan holders themselves, each plan is different. Doing
your homework before hand and seeking professional advice can help you avoid any painful surprises.
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