Your desire to stow away part of your income for retirement may be dampened by short-term needs. You may need extra money for a major purchase, legal fees, medical costs or other large expenses that cannot be covered by your regular income. You need to withdraw money from your 401(k) with an eye toward federal regulations and long-term repercussions.
In order to make a withdrawal from your 401(k) plan, you can receive your funds as part of a 401(k) loan, a regular withdrawal, or a rollover into your IRA.
Get To Know Your Plan
Read through your 401(k) plan information. Some 401(k) plans offer loans. Loans through your retirement account provide money for certain kinds of emergencies that can be repaid through paychecks over a matter of 5 years. These loans do not have the penalties or taxes associated with a regular withdrawal. Learn the number of withdrawals you can make from your 401(k) in a given year. The account manager and your employer may set a limit on cash withdrawals to encourage responsible saving for retirement. A low number of withdrawals means it is advisable to make one transaction for a fiscal year to minimize the withdrawal penalty.
Research the Penalties
Research the withdrawal limits of your 401(k) plan in order to decrease the penalty assessed on withdrawn funds. You should use this upper limit, along with available funds from other accounts, to get enough money for your immediate needs. Utilize an after-tax 401(k) account to decrease your withdrawal penalty. At the beginning of a new job, you need to review the available 401(k) options for a Roth account that is tax-free on retirement. This account option allows you more flexibility for withdrawals and limited tax liability during retirement.
Uses for a 401 (k) Loan
Use 401(k) withdrawals to pay for a down payment on your first home to avoid penalty. Down payments and closing costs for your first home falls under the Internal Revenue Service's definition of hardship for 401(k) accounts. Loans and withdrawals for home owners are given lenient standards by Congress to encourage housing expansion. You can also extract money from your 401(k) with no penalty to avoid eviction from your residence. The immediacy of this type of expense, along with the need for an employee to have a residence in order to work effectively, make this another type of financial hardship regulated by the IRS.
You are also able to use the funds for your education without penalty when you withdraw funds from your 401(k). The federal government allows workers to return to school by applying no penalties to retirement funds used for college tuition, up to a certain level. Lastly, you can use a 401 (k) loan to pay medical costs not covered by insurance by removing money from your retirement account. You can withdraw money from your 401(k) to pay bills accrued during surgeries and emergency procedures that are not sufficiently paid for by your insurance plan.
This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.