401k Withdrawal Options

401(k) plans were first introduced in 1980, and now a multitude of companies offer defined contribution plans as a benefit to their employees. This is the ideal way to save for retirement with pre-tax dollars and typically an employer will also match the funds. However, even though these funds are intended for retirement, many Americans find that they need to tap into these funds in an emergency, although actually withdrawing money from a 401(k) plan is easier said than done.

This is especially true if an individual wishes to withdraw money from their 401(k) plans before they reach the official distribution age of 59 1/2. There are a number of ways in which a person can access their 401(k) funds and amongst the three most common are hardship withdrawals, non-hardship withdrawals and loans. It is recommended that individuals consult with a financial professional to help them determine which withdrawal option is most suitable in their personal situation.

Hardship withdrawals
If an individual is employed by a company that offers a 401(k) plan, they will typically have the opportunity to access these savings if they are considered to be suffering a financial hardship. However, it must be said, that it is extremely difficult to qualify for this particular provision. In fact, many individual 401(k) plans will have a set of qualifying financial hardships in line with the IRS.

These financial hardships may include emergency medical expenses or funds needed to pay towards a disability, but having to qualify under both sets of rules will generally make it even harder to withdraw money. In addition to this, if an individual wishes to make a 401(k) withdrawal before they are aged 59 1/2, there will be a 10% penalty on whatever amount is withdrawn. It is important to note that the withdrawal will also be taxed, and therefore taxes and penalties can make a hardship withdrawal fairly expensive.

Non-hardship withdrawals
It must be said that not every plan will allow for non-hardship withdrawals, however, if an individual is able to make this type of withdrawal from their 401(k), they are able to distribute and use the money as they see fit. It is generally advisable to roll the funds into an IRA, as this can help to avoid taxes, there are far more investment options available, and these will typically have lower administrative fees. However, any rollovers that are made directly to the owner of a 401(k) will need to be reinvested into a qualified plan within a 60 day period or the plan owner will need to, once again, pay a 10% penalty.

If an individual is in dire financial need their only option may be to obtain a 401(k) loan. A 401(k) loan will allow a person to borrow against their savings, although some companies may impose certain restrictions that are fairly similar to those for hardship withdrawals. The loan will also need to be repaid, typically within 5 years, and the loan cannot be rolled over into an IRA.

Individuals who are looking to take this course of action need to be extremely wary if the leave the company, but still have an outstanding 401(k) loan, as often this will need to be repaid within a relatively short space of time, such as one to two months.

Many people also take the option of an installment plan. This is where money will be distributed to the plan owner through a number of small monthly payments for a period of typically 5, 10 or 15 years. However, this option will generally still have a 10% withdrawal penalty and taxes will be due, although this is a great option if a person needs some extra income.

It is recommended that any individual looking to make an early withdrawal from their 401(k) should consult with a financial professional. The tax consequences and the impact an early withdrawal may have on a person’s future retirement savings can be very serious. Therefore, it is important for an individual to make the right choice and carefully consider the options available to them.

For individuals who are aged 59 1/2 or over there are no 401(k) early withdrawal penalties. And anyone aged over 70 1/2 will start having to take out mandatory 401(k) withdrawals, and these withdrawals will be based on the account balance and their predicted life span. It is actually possible to take out more than the mandatory withdrawals, but never any less.

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