Accessing 401 (k) Funds before Retirement – What are your Options?
It can happen – you are in dire need of cash fast and do not have enough funds in your bank account. An unanticipated event has happened and you need money. You begin to questions accessing money from your 401 (k) retirement account. Here are some possible options you have if you need to access your funds before reaching the age of 59 ½:
Early Withdrawal One option is just to withdraw the funds you need. This comes with a 10% federal tax penalty, however, and also must be stated as income on your present year tax return. This is the most costly and least efficient means of accessing funds from your account.
Loan Many 401 (k) plans allow for loans to be taken out for accessing 401 (k) plans early. These loans accrue interest, and the 10% tax penalty will be issued if the loan is not 100% serviced.
Hardship Withdrawals If there are justifiable causes as to why you need to access the money before retirement, there may be a way to access the money penalty-free before the age of 59 ½. What is a justifiable cause? Some examples are medical expenses, preventing foreclosure on your primary residence or providing necessary repair work on that residence, and burial costs. Consult your tax professional for more information.
72(t) Distributions If you have retired before the age of 59 ½, there is a way to access money from your 401 (k) penalty-free. After you have quit working and are officially retired, the 401 (k) rolls over into an IRA. Once the roll-over has completed, you apply with the IRS for a 72(t), which allows you to take out an equal amount of money every year, either until you have reached 59 ½ or you have been receiving a stream for at least five years, whichever comes first. This amount that is distributed is set-up through a calculation based off of several components including age and amount of funds within the account. Your tax professional will be able to give you more information about this means of early access.
Accessing at 55 Another penalty-free access to needed funds from a 401 (k) plan is accessing from a plan with a company you no longer work with. Once you reach the age of 55, you may access these funds.
These are just some of the options you have for prematurely accessing funds from your 401 (k) account. Before pursuing any of the above options, consult with your tax professional, as there may be particular circumstances to your situation which do not allow for a penalty-free withdrawal.
