As we accumulate money in our 401(k), the temptation to access the funds can be obvious.
There are rules which can be followed to allow pre-mature access to your 401(k) account. A 401(k) was created by Congress to allow workers to accumulate funds for retirement on a pre-tax basis. Eventually, the taxes will need to be paid on your 401(k) retirement plan. Accessing the funds should be done with planning and to use them for retirement income. Life is full of uncertainty, the funds in your 401(k) can be assessed for other reasons; with that access can come unwanted or excessive taxation and penalty. Make sure you fully understand your options before taking action.
Early withdrawal all depends on how early. Any access before age 59 1/2 can come with penalties. The IRS allows for earlier access based on specific reasons, this access while still, taxable would not have any penalties. Account-holders younger than 59 ½ pay a 10% fee calculated on the total 401(k) monies that are withdrawn.
Under hardship rules funds can be accessed before 59 1/2 if the plan owner can show cause, the cause can be:
- To cover medical expenses
- To cover funeral expenses
- To buy a house
- To avoid foreclosure or eviction from your primary residence
- To pay a college tuition bill that’s due within 12 months
The critical thing to remember is the term “hardship,” and it needs to be well documented. Your plan administrator will need to show this documentation to the IRS. Any funds removed from your 401(k) will be.
Some additional exceptions exist to avoid the penalties on an early withdrawal. They can include the following:
- You leave your job, whether voluntarily or involuntarily, after the age of 55, you may access your funds as an IRA rollover
- Your medical expenses exceed 7 ½% of your adjusted gross income
- A court orders the funds removed
- You leave work and set up a special withdrawal plan intended to last the rest of your lifetime; this plan is called a 72 T.
- You become disabled, and a medical doctor or court concurs.
Like all important decisions, make sure you fully understand the benefits and consequences of accessing a pre-tax account. It is always a smart idea to obtain advice from a licensed professional. The IRS and Congress occasionally make changes to rules, make sure your information is up to date before taking action.