Can You Get Cash Out of Your 401K Before You Retire?
- Under normal conditions, a 410k starts making qualified distributions after its account holder reaches the retirement age of 59-and-a-half. However, 401k rules allow certain qualified early withdrawals without a penalty and other permitted non-qualified early withdrawals with a penalty. Income taxes will apply in both situations at the time of the withdrawal. A 401k account holder may also make early withdrawals in the form of a 401k loan without neither the income tax or a penalty as long as the person pays back the loan on time to his original 401k account.
- There are 401k rules that will waive the excess-tax penalty, which is 10 percent of the total amount withdrawn, if the reasons for an early withdrawal meets the special conditions specified in the 401k rules. A 401k account holder may request a qualified early withdrawal if he is no longer working at the age of 55 or older, has become totally and permanently disabled, is following a domestic court order to satisfy required dependent support with his 401k funds or will use the funds for tax-deductible medical expenses.
- Hardship withdrawals are unqualified early withdrawals with penalties. Hardship withdrawals must also meet specified withdrawing conditions and are for only the prescribed fund uses. To request a hardship withdrawal, the person's financial need must be immediate and severe, there are no other funds to meet the need, and the amount of withdrawal is not exceeding the amount needed. In addition, the funds withdrawn must be for one of the following uses: non-tax-deductible medical expenses not reimbursed, payments for the purchase of principal residence, funds used to prevent eviction or foreclosure, higher educational costs, expenses for principal-home repair or funeral spending for a family member.
- A 401k account holder may borrow from his own 401k account to meet certain early cash needs. The term of a 401k loan normally is less than five years. The loan requires substantial equal periodic payments for at least once every quarter over the term of the loan. The borrower makes loan payments back to his 401k account using after-tax income, along with any interest charged. Any default on the loan will trigger the 10 percent excess-tax penalty and regular income tax on the amount overdue.
