When Can You Withdraw Penalty-Free From Your 401(k) Or IRA?

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Note from the Editors: This article first appeared on Personal Capital.

401(k) plans, IRAs, and other tax-advantaged retirement savings accounts are popular ways to save for retirement, with millions of Americans contributing annually.

It’s generally a good idea to avoid taking money out of your 401(k) because there are often significant penalties and taxes to consider.

Unforeseen circumstances, on the other hand, may force people to take money out of their 401(k) early.So, if you find yourself in a situation where you need to access your retirement funds early, here are some guidelines to follow and options to think about.

Withdrawal Rules for 401(k) Plans

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Keep these important rules in mind if you need to take money out of your account early.

If you take a distribution from an IRA or 401(k) before turning 59, you will almost certainly owe both federal income tax (taxed at your marginal rate) and a 10% penalty on the amount you withdraw, plus any applicable state income tax.This has a tendency to add up.

With these consequences in mind, early withdrawal from a 401(k) or IRA is usually not a good idea.

Withdrawal Rules for 401(k)s and IRAs Affected by the Coronavirus

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In response to the economic hardships caused by the COVID-19 pandemic, the CARES Act established special withdrawal allowances for retirement savers in 2021.In 2021, the 10% penalty for early withdrawal will be reinstated.Withdrawal income will be counted as income in the 2021 tax year.

However, the COVID-Related Tax Relief Act of 2021, which was passed in December, provides relief for withdrawals from retirement plans due to qualified disasters.To be eligible, taxpayers must have lived in a designated disaster area and sustained financial loss as a result of the disaster.

In 2021, retirees may be able to take advantage of a temporary tax break.

  • Take advantage of penalty-free withdrawals from certain retirement plans for coronavirus-related expenses.
  • Pay the tax over a three-year period.
  • Recontribute funds that have been taken out.

With Personal Capital’s free Retirement Planner, you can compare a variety of retirement scenarios.Millions of people use this financial tool to see if they’re on track for retirement and what they can do to improve their odds.

The Costs of 401(k) Early Withdrawals

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Early withdrawals from an IRA or 401(k) account can be costly due to the steep penalties that can be imposed in a variety of situations.

After age 59, the IRS allows penalty-free withdrawals from retirement accounts, and after age 72, withdrawals are required (called required minimum distributions or RMDs).These rules have some exceptions for 401(k)s and other qualified plans.

Consider your retirement savings accounts as if they were a pension.People who are saving for a pension often forget about it until they reach retirement age.They won’t be able to get it before they retire.

While that money is stashed away until later in life, it becomes a tremendously valuable asset in retirement.The 401(k) is a great way to save for retirement.It allows you to change jobs without sacrificing your savings.However, if you treat it like a bank account in the years leading up to retirement, everything starts to fall apart.Your best bet is to wait until you’re at least 59 years old before withdrawing any retirement funds.

There are times when it’s difficult to avoid taking money out of retirement accounts – whether there’s a 10% penalty or not.But, before you pay the penalty, keep in mind that the IRS makes exceptions to the 10% penalty rule in a variety of situations.

These exceptions may make it possible for you to access your retirement funds in an emergency without having to pay the IRS an additional penalty.They require some planning and attention to implement, so it’s best to be aware of them ahead of time.

If you’re not sure whether or not you should take a withdrawal, use this calculator to see how much money others your age have saved.

Before you make a withdrawal from your retirement account, ask yourself these questions.


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There are many good reasons to take money out of your retirement account early.However, keep in mind that your retirement funds are not easily accessible.Retirement may seem like a distant dream, but hopefully it will become a reality for you one day.So, before you take any money out, consider whether you really need it right now.

Consider it this way: instead of saving money, you’re actually paying it forward.If you’re still early in your career, you might be unattached and adaptable right now.However, none of those things may apply to your future self.Return the favor.

With all of this talk of 10% penalties and not touching your money until you’re retired, it’s important to note that there is a solution if you need to access your retirement funds before you turn 59.

If you qualify, make a Roth IRA contribution.

Because Roth contributions are made after-tax, you can usually withdraw from one with fewer consequences.Keep in mind that Roth IRA contributions have income limits and that you will still be taxed if you withdraw funds before the account has been open for five years, but some people find the ease of access appealing.

However, for some people, a Roth-style account is not readily available or accessible.

Reasons for Penalty-Free Withdrawals from a Retirement Fund

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If you find yourself in a situation where you need to take money out of your 401(k) or traditional IRA early, there are a few scenarios where the 10% penalty may be waived.This excludes items that deal with death or total incapacitation.In that case, a penalty tax is unlikely to be at the top of your priority list.

Keep in mind that, while these exceptions may allow you to avoid the 10% penalty, any premature IRA or 401(k) distributions will still be subject to income tax.Also, keep in mind that these are just outlines.Anyone who wants to take money out of their retirement account early should consult with their financial advisor.

Hardship withdrawals from a 401(k)

Some 401(k) plans allow for a hardship withdrawal, and education expenses are sometimes included in this category.It’s worth noting that the expenses that qualify for a hardship withdrawal depend on your 401(k) plan administrator.

Make sure you understand what will be covered by your plan.Some providers don’t allow any withdrawals due to financial hardship.For most types of hardship withdrawals, you’ll also be charged the 10% fee for taking funds from your 401(k) early.

There are some exceptions, but education costs are rarely one of them.Essentially, hardship withdrawals allow you to take money from your 401(k) before reaching the age of 59, but you will almost always be penalized.

Insurance or medical expenses

If your unreimbursed medical expenses in a given year total more than 10% of your adjusted gross income, you can pay them out of an IRA without paying a penalty.

If your unreimbursed medical expenses total more than $7,500, you can take a 401(k) withdrawal.If your adjusted gross income for the year is less than 5% of your total income, the penalty will most likely be waived.

Situations in the family

The 10% penalty can be waived if you are ordered by a court to provide funds to a divorced spouse’s children or dependents.

a series of payments that are roughly equal

If none of the above exceptions apply to you, you can start taking distributions from your IRA or 401(k) without penalty at any time before the age of 59 by taking a 72(t) early distribution.

It gets its name from the tax code that describes it and allows you to make a series of annual payments.The amount of these payments is determined by a formula that takes into account your current age as well as the size of your retirement account.For more information, go to the IRS website.

The catch is that you must continue to make periodic payments for five years or until you reach the age of 59, whichever comes first.Furthermore, even if you no longer require the funds, you will not be permitted to take more or less than the calculated distribution.So be wary of this one.

(IRA only) Education

You can use an IRA distribution to pay for qualified higher education expenses like tuition, books, and supplies.Although this distribution is still taxable, there will be no additional penalty.

For example, if you need money to return to graduate school, you can use your retirement fund to pay for tuition.This exception can also be applied to your spouse’s children or descendants under the rule.Keep in mind that this only applies to IRAs; 401(k)s and other qualified plans are governed by a different set of rules.

Purchase of a first home

For a first-time home purchase, you can withdraw up to $10,000 from your IRA penalty-free.If you’re married, your spouse has the ability to do the same.Also, the term “first-time homeowner” is used rather loosely.

If you haven’t owned a home in the last two years, it’s considered your first-time home according to the IRS.You can use this option for the benefit of your family in the same way that you can use the education exclusion.Even if you’ve previously used this benefit or already own a home, your children, parents, or other qualified relatives may be eligible for the same $10,000 for their purchases.

Home purchases for the first time or new construction may also qualify for a 401(k) hardship withdrawal.The 10% penalty will almost certainly apply here as well.

Withdrawals caused by the Coronavirus

The coronavirus has presented us with some unique challenges, and many people have been financially impacted as a result.Last year’s CARES Act included several provisions to help retirees save for their future.RMDs have been suspended for 2021, allowing people to postpone taking distributions from their retirement accounts if they so desire.Those who took RMDs in 2021 were able to return those funds to their IRA or 401(k) and postpone any future distributions until 2021.

In 2021, there were also new rules regarding early distributions and loan flexibility, as well as special withdrawal allowances for retirement savers.In 2021, the 10% penalty for early withdrawal will be reinstated.Withdrawal income will be counted as income in the 2021 tax year.

However, the COVID-Related Tax Relief Act of 2021, which was passed in December, provides relief for withdrawals from retirement plans due to qualified disasters.To be eligible, taxpayers must have lived in a designated disaster area and sustained financial loss as a result of the disaster.

What if you only require funds for a short period of time?

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Although there are other qualifying exceptions for penalty-free withdrawals from an IRA or 401(k), the ones listed above are the most common.But what if you don’t want to pay any taxes at all?You can still borrow money from your 401(k) through a loan.You get the interest, the loan isn’t taxable, and it won’t appear on your credit report.This is how it goes:

Loan from a 401(k) plan

If your employer agrees, the IRS allows you to borrow against your 401(k).It’s worth noting that not all employer plans allow loans, and they’re not obligated to do so.If your plan allows loans, the terms will be determined by your employer.

The IRS allows you to borrow up to $50,000 or half of your 401(k) vested account balance, whichever is less.Throughout the loan, you pay yourself principal and interest at a rate a few points above prime, which is deducted from your paycheck after taxes.In most cases, the maximum term is five years.When used as a down payment on a primary residence, however, the loan term can be as long as 15 years.Employers may require a minimum loan amount of 1000 dollars in some cases.

The advantages of such a loan are self-evident.You don’t need a credit check, and interest is paid to you rather than a bank or credit card company.The interest rates are usually lower than what you’d get elsewhere, and the paperwork is straightforward.

Now for the disadvantages: If you leave your job (or are fired), your loan is usually due within 60 to 90 days.If you don’t pay it back, the IRS will charge you a penalty.You won’t be able to borrow from an old 401(k) plan either.However, you can only borrow from a 401(k) if you are still employed by the company that owns the 401(k).

If you transferred your 401(k) funds to an IRA, you won’t be able to borrow from it.Taking a 401(k) loan depletes your retirement principal and eliminates any compounding that would have accrued on your borrowed funds.

Bridge loan for IRA rollovers

There is one more way to take a short-term loan from your 401(k) or IRA.You can transfer it to a different IRA.You are only allowed to do this once every 12 months.

When you roll an account over, you have 60 days to deposit the funds into the new retirement account.During that time, you are free to do whatever you want with the money.If it is not safely deposited in an IRA before the time limit expires, however, the IRS will consider it an early distribution.You will be subject to full-fledged penalties.This is a risky move that isn’t usually advised.However, if you want an interest-free bridge loan and are confident in your ability to repay it, it is a viable option.

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