Withdrawing cash from your 401(k) is quite a risky decision. Borrowers under the age of 59.5 years old are subject to penalties and restrictions that older individuals never have to face. Further, if you find yourself unable to repay the balance in time, say, if you transition to a new employer, you may end up regretting the decision to withdraw. Still, there are many reasons for which you may need to borrow from your 401(k). Some of these are justifications for evading penalties. To find out how you can withdraw from your 401(k) without those pesky taxes and fees, consult the information below.
Withdrawing from Your 401(k) Plan
There are only a handful of circumstances in which you may be allowed to withdraw from your 401(k) plan without penalty. These are as follows:
- You are 59.5 years or older. The Internal Revenue Service (IRS) incentivizes workers to undergo a long-term savings strategy by imposing a 10% early withdrawal fee of 10%. Anyone over that age limit can withdraw funds whenever they like, though. So, the first option for withdrawing without penalty is waiting until you reach 59.5 years of age.
- Your funds are being rolled over from one account to the next. Individuals that are 55 years of age or older are allowed to withdraw money from their 401(k) account. Yet, this only applies under the condition that they are separating from a previous employer by being fired, quitting, or by another way. In such circumstances, there is a 60-day limit for rolling over your funds to a new 401(k) or Individual Retirement Account (IRA).
- Note: Rollover your funds by transferring directly from the old, to the new custodian. Why? This is the most reliable way by which you can avoid the automatic 20% income tax withholding.
- You have an eligible hardship that requires the withdrawn funds. Eligible hardships include:
- Any medical debt that equates to 7.5% or more of your Adjusted Growth Income (AGI).
- Note: There are exceptions to this rule. Primarily, the medical debt of borrowers under the age of 65 years old must have medical debt that exceeds 10% of their AGI.
- You have a permanent disability.
- You are being summoned to active duty military service.
- You have been issued a court order to withdraw the funds to pay a dependent or former spouse.
- Any medical debt that equates to 7.5% or more of your Adjusted Growth Income (AGI).
These are not the only circumstances under which you will be able to circumvent withdrawal penalties. A few more conditions are described below.
Additional Circumstances Under Which You Can Avoid Penalties
You may be one of the fortunate group of people who have the means to retire early. If you choose to do so, specifically by the age of 50, you will be required to agree to SEPP (substantially equal periodic payments) according to IRS 72(t). This will allow you to withdraw funds from your 401(k) once annually, either for at least five years or before you reach the age of 59.5. There are three options for this agreement, listed below:
- RMD Method. Your life expectancy determines these payments.
- Fixed Annuitization Method. These payments are calculated by the IRS mortality table’s annuity factor.
- Fixed Amortization Method. This is another method determined by life expectancy and an IRS-approved interest rate.
To decide which of the options described here are best for you, get in touch with a 401(k) plan provider today. They will guide you in making the right decision for your finances, both for now and into the future.
