Withdrawing from a 401k plan is normally considering a dicey option as most analysts advise against it. However, life has a funny way of getting in the way and creating situations where the need for this cash arises. The problem of course is that early withdrawals before the age of 59½ usually bring on a 10% early withdrawal penalty from the IRS. However, there are instances where you can withdraw from a 401k and it not trigger this penalty. These instances include (1) a rollover the money into a retirement account like an IRA, (2) a hardship withdrawal, and (3) a 401k loan.
Rollover into retirement account
This is made possible because of the value our federal government places on retirement plans. A 401k is designed to operate for the time while you are working. In fact, you will be forced to take taxable withdrawals at the age of 70 anyway. Rolling the money into a retirement account like an IRA allows you to keep growing and protecting that money and avoiding a taxable event until money is taken out from it. The only exception would be if the money was rolled into a Roth IRA which taxes all contributions without deferring them. Also, if you plan on withdrawing from 401k plan and rolling it into another retirement account, it is very important that you make a trustee to trustee transfer to avoid accidentally triggering an early withdrawal penalty.
Hardship withdrawal
A hardship withdrawal can be given if you need help avoiding foreclosure or eviction, paying college tuition, pay medical bills, or funeral costs. It requires paperwork showing proof of need and suspends your contributions to the 401k for six months. However, if you find yourself in such a pressing situation, this can be very helpful at allowing you access to 401k funds without an early withdrawal penalty.
Loans or borrowing from 401k plan
Loans can actually be given where you borrow money from your 401k. You can borrow up to the lesser of two amounts ($50,000 or 50% of your contributions). It has a number of pros and cons to it. However, the biggest con is that you will have to pay the whole amount borrowed within 30 to 60 days after losing or leaving your job. Many financial advisors only recommend borrowing from the 401k if you have no other choice. However, your current circumstances may dictate such a need has occurred.
Knowing the above options can be very helpful in helping you avoid additional IRS tax penalties when withdrawing from 401k plans. If you plan on using one of the above options, we recommend you look into the option more closely as each one has carefully crafted rules regarding its use. Knowing these rules can help ensure you get the money you need and keep you from inadvertently triggering an early withdrawal penalty.
source ezine