Taking Money Out of Your 401(k)

Taking Money Out of Your 401(k)

You’re probably familiar with the rules for putting money into a 401(k) plan. But are you familiar with the rules for taking your money out?

All 401(k) plans are not the same

Federal law specifies the withdrawal options that a 401(k) plan can offer. But your plan can be stricter than the law allows (i.e., offer fewer withdrawal options), and may even provide that you can’t take any money out until you reach normal retirement age (usually 65). However, many plans are more flexible.

Think twice

Remember that your 401(k) account is there for your retirement. You should use it before then only as a last resort. And keep in mind that distributions made prior to age 59 are generally subject to a 10% premature distribution tax (unless an exception applies) in addition to any income tax due.

First consider a plan loan

Many 401(k) plans allow you to borrow money from your own account. A loan may be attractive if you don’t qualify for a withdrawal, or you don’t want to incur the taxes and penalties that may apply to a withdrawal.

In general, you can borrow up to one half of your vested account balance (including your contributions, your employer’s contributions, and earnings), but not more than $50,000.

You can borrow the funds for up to five years (longer if the loan is to purchase your principal residence). In most cases you repay the loan through payroll deduction, with principal and interest flowing back into your account. But keep in mind that when you borrow, the unpaid principal of your loan is no longer in your 401(k) account working for you.

Withdrawing your own contributions

If your plan allows, you can withdraw your own pretax contributions (and in some cases earnings) for one of the following reasons:

You terminate employment
You attain age 59½
You become disabled
You incur a hardship
Not all hardships qualify. In general, you must need the money to (1) purchase a principal residence or repair a principal residence damaged by an unexpected event (e.g., a hurricane), (2) prevent eviction or foreclosure, (3) pay medical bills, (4) pay certain funeral expenses, or (5) pay certain education expenses. But think carefully before making a hardship withdrawal. In most cases your employer must suspend your participation in the plan for at least 6 months after the withdrawal, and you could lose valuable employer matching contributions. And you generally must take a plan loan before you can make a hardship withdrawal, unless a loan would make your hardship worse.

Withdrawing employer contributions

Getting employer dollars out of a 401k) plan can be more challenging. Many plans won’t let you withdraw employer contributions at all before you terminate employment. But some plans are more flexible, and let you withdraw at least some vested employer contributions before then. “Vested” means that you own the contributions and they can’t be forfeited for any reason. In general, a 401(k) plan can let you withdraw vested matching or profit-sharing contributions if:

You become disabled
You incur a hardship
You attain a specified age
You participate in the plan for at least five years, or
The employer contribution has been in the account for a minimum of two years
Be informed

You should become familiar with the terms of your employer’s 401(k) plan to understand your particular withdrawal rights. A good place to start is the plan’s summary plan description (SPD). Your employer must give you a copy of the SPD within 90 days after you join the plan.