How Do I Take Money Out of A 401(k)?
There are various ways to save for retirement. When examining those ways, you can’t help but stumble across the 401(k). The 401(k) is probably the most popular and efficient way to save money for retirement. It came into existence in the late 70s and since then it has been the most popular type of employer-sponsored retirement plan in America.
The 401(k) is a retirement savings plan that allows the employee to contribute a certain portion of his or her salary on a monthly basis. Most companies also offer a match to help employees boost their retirement savings. But it’s when it comes to taking the money out, that the majority of questions surface.
In this article, we will explain how a person takes money out of the 401(k) account once they leave their job and while still working.
Taking Out Money of A 401(k) Once You Leave Your Job
If you are no longer working for the company that sponsored your 401(k), then you’ll first need to contact your plan administrator and get an understanding of the process of either withdrawing or transferring your account.
When you take money out of your 401(k), it may fall into any of these categories:
Regular 401(k) Withdrawal
If you no longer work for the company that sponsored your 401(k) and you decide to leave it there, then this one applies to you. If you are above the age of 59 ½ you can just simply do a withdrawal in any amount at any time you would like. If it’s a traditional 401(k), you will pay tax, but you will not pay a 10% penalty since you’re past the age of 59 ½.
Early 401(k) Distribution
This one applies to you if you no longer work for the company that sponsored the plan and you withdraw money before age 59 ½. In this scenario, you will not only pay the income tax owed, but you will also pay a 10% penalty for taking out the money prematurely. That said, there are certain scenarios where Lake Jackson individuals who reach the age of 55 qualify for a distribution and will not have to pay the 10% penalty. This rule states that if you are terminated, downsized, or quit your job between the ages of 55 and 59 ½ , you’re eligible for distribution without being penalized.
401(k) Rollover to IRA
If you are no longer working for the company that sponsored your plan, however, you don’t want to withdraw any money right now, then you have the ability to roll your 401(k) over into an IRA. By doing this, you won’t have to pay any taxes or be penalized, and you can allow the funds to continue to grow until a time that you ultimately do want money to come out.
This is a popular strategy in two scenarios. One, if you’re still working and you go from one job to the next, but you want to have control over your original 401(k), rolling it into an IRA is a good idea. The other scenario where this happens is when you want to fully retire from a company. Most people will take their 401(k), roll it into an IRA, and then start doing withdrawals annually for retirement income.
Taking Out Money When You Are Still Employed
Depending on the company and its 401(k) plan, the criteria for taking money out while you’re still employed will differ. That said, there are a few scenarios where you can get your money and those are as follows:
If the plan does not allow the employee to simply withdraw the money while he or she is still employed at the company, there is typically an option for a loan. If you want to take a loan, keep in mind that there’s typically a maximum of $50,000 that you can “borrow out” and you are generally required to set up a payment plan back into 401(k), not to exceed five years.
401(k) Hardship Withdrawal
Another option that may be available is a 401(k) hardship withdrawal. If your company does allow you a hardship withdrawal, these are the reasons in which case you would be allowed to do so:
-Major medical expenses
-A down payment for the purchase of a principal residence
-Funeral and burial costs
-Any payments that are necessary to stave off an eviction or foreclosure on your principal home
-Educational and tuition fees and expenses
-Repairs for major damages to your home
-Any loss of income or expenses incurred if you live in a FEMA-designated disaster zone
An in-service distribution occurs when an employee takes a withdrawal out of their 401(k) account, however, they are still working for the company. Not all plans allow this, but one common reason for this is when an employee wants to move some of their 401(k) money out of their current plan and into another vehicle like an outside IRA or annuity.
As you can see there are a number of different reasons for taking money out of a 401(k). Ultimately, if you’re thinking about withdrawing money out of a 401(k), it comes down to whether or not the withdrawal and the subsequent taxes and possible penalties are worth it. You should always consult a knowledgeable advisor as to the best way to do so.