A common question that many Americans ask is ‘when can I take money out of my 401k?’ It’s not only a question that people approaching retirement ask but also a query raised by increasing numbers of cash strapped workers.
The simple answer to the question ‘when can I take money out of my 401k?’ is ‘at any time’. However, if you’re under the age of 59 ½ then you may end up paying penalties. Keep reading to find out the consequences if you want to withdraw from your 401k plan.
Taking money out of your 401k on retirement
The standard age for taking cash out of your 401k plan is 59 ½. So, if you are over that age then you can take your money out as dispersals and you’ll just pay standard income tax.
There are other situations where you can withdraw cash from your 401k plan before the age of 59 ½ without paying a penalty. Such situations include:
- You become permanently disabled
- You die and the account is paid to your beneficiary/estate
- You make an allowable medical expense deduction (where your medical expenses exceed 7.5 per cent of your adjusted gross income)
- You’re separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turned 55 or later
- You have to pay a levy on the 401k plan itself
In these instances the normal income tax rules apply, but you won’t pay a penalty.
Taking money out of your 401k at other times
If you’re under the age of 59 ½ and you want to take money out of your 401k plan for any other reason, you will generally pay a 10% withdrawal penalty in addition to any income tax that is applicable.
CNN reports that ‘David Wray, president of the Profit Sharing/401(k) Council of America, said that people making hardship withdrawals could pay a penalty of up to 40 per cent, once state and federal taxes are added to the 10 per cent penalty.’
Other factors to consider if you want to take money out of a 401k
As well as the potential tax and penalty implications, there are other factors you should take into account before you take money out of your 401k.
Firstly, withdrawing money means that you will be sacrificing the benefit of an earlier 401k plan contribution and you will lose all the potential future investment growth of the money you withdraw.
Secondly, you can’t make up these contributions at a later date and so you may find you receive a smaller income in retirement than you had planned for. Finally, you will also be giving up excellent tax benefits (your contribution is tax deductible and the growth of your account is tax deferred).