Can You Withdraw From Your 401(K) Early?

American Investment Planners LLC

500 North Broadway, Suite 260, Jericho, NY 11753

(516) 932-5130 / (866) 932-5130

In times of financial hardship, it's only natural to seek income from outside sources. Maybe you have family members who have the ability to lend you a hand in your time of need. Or, perhaps you are able to refinance some of your current loans to lessen your payments, leaving you with some money left over to take care of your current concerns. Though both are valid approaches, another route many often consider is to borrow from their 401(K), even when they are far off from retirement age.

That brings us to today's question - can you withdraw from your 401(K) early? 

Although your 401(K) is designed to help you save for the point in your life where you no longer receive a steady pay check, the truth is that you can borrow from it ahead of time. However, doing so will cost you in penalties, which can vary depending on the situation.

The following are three types of withdrawals you can make before you reach retirement age:

Hardship Withdrawal

While your plan may define a hardship differently than another, common examples of hardships include sudden disability, the loss of a loved one where you are responsible for burial or funeral costs and the need to cover medical expenses. Although you will likely still face the early withdrawal penalty and owe taxes, it doesn't hurt to inquire about whether or not your hardship qualifies you to receive money penalty-free.

Loan

Many companies offer their employees the opportunity to borrow from their 401(K) in the form of a loan where they pay themselves back through interest. Though this type of withdrawal can be used for any circumstance, there are often restrictions about how much you can take out so you'll need to borrow wisely. 

72(t) Withdrawal

Under the IRS rule 72(t), you are permitted to withdraw a fixed amount of money based on your life expectancy. As explained by CNN Money, this rule explains that "you must take withdrawals for at least 5 years or until you reach age 59 1/2, whichever is longer." For this type of withdrawal, keep in mind that although there isn't a penalty for borrowing early, you are still required to pay taxes on what you take out.

Still have questions about withdrawing from your 401(K) before you become eligible to retire? Contact American Investment Planners LLC! We specialize in retirement planning and are well versed on various aspects of the retirement planning process, including 401(K) plans and how borrowing from them works. To speak with a member of our team, please give us a call at (516) 932-5130.