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If You Need Your 401K Money Now, Follow These Tips
With inflation steadily rising many middle-class Americans are screaming out, “I Need My 401K Money Now!” But what can you do if you need access to your 401k money now rather than later?
With millions of Americans contributing to their 401(k), employers offering them, and people retiring at different times, there are numerous options available to withdraw money from your 401(k).
An adviser can guide you through these choices and help you manage your investments so you don’t run out of money before you reach retirement age.
Wait Until You’re at Least 59.5 Years Old Before Withdrawing from Your Retirement Account
If everything goes according to plan, by the time you’re 59.5 years old, you won’t need any of your retirement savings. You’ll be able to start taking withdrawals from your 401(k).
Withdrawing from a traditional IRA isn’t mandatory until April 1st of the following year, but you should take an RMD regardless of when you withdraw. If you haven’t taken one yet, you should start doing so now.
Take an Early Withdrawal from Your Retirement Account
If you need cash right now, perhaps you could withdraw some funds from your 401(k). However, if you do so, be aware that you’ll pay a 10% tax on top of any regular income tax you owe.
Withdrawing funds too soon can hurt your retirement savings, so consider the consequences of taking out too much money before age 59 1/2. A 30-year-old who withdraws $5,000 from her 401(k) plan could end up losing about 20% of her nest egg.
That’s because if she doesn’t start investing again right away, she’ll miss out on the compounding effect of those earnings. In addition, she’d pay taxes on any withdrawals, plus penalties for premature distributions.
Request an Emergency Withdrawal from Your 401(k)
If you’re facing an emergency situation where you don’t have enough money to cover basic expenses, you may be able to withdraw from your retirement account without having to pay any taxes. However, keep in mind that if you take out too much money, you could end up owing back taxes.
- Health insurance for yourself, your spouse/partner, children, grandchildren, parents, siblings, etc.
- Cost associated with buying your primary residence (not including mortgage payments).
- Your tuition, related educational fees and living expenses for the next year of college for you, your spouse/partner, kids, dependents or beneficiaries
- Mortgage payments necessary to prevent foreclosure on your primary residence or eviction from your primary residence
- Funeral expenses for yourself, your spouse, children, or dependents
- To repair damage to your primary home
An employee who leaves his job before retirement age can take out an early withdrawal without paying any taxes or penalties.
But once he reaches 59½, he must start taking into account the 10 percent federal income tax rate on withdrawals from traditional IRAs and Roth IRAs.
He must also begin paying Medicare premiums. And if he takes money out of a traditional IRA or Roth IRA, he’ll owe income taxes on the earnings.
Take Out a 401(k) Loan
You can also access your retirement savings through a traditional bank account. Withdrawing money from a 401(k) plan requires special tax treatment, so if you’re not careful you could end up paying penalties and interest charges.
A 401(k) loan is typically repaid within five years, and the funds aren’t taxed until they’re withdrawn. Unlike a regular loan, you won’t see any repayment on your credit report. However, if you do decide to withdraw money from your 401(k), make sure you consult a financial advisor before doing so.
There are some risks involved with this option. If the loan doesn’t get paid back according to the terms set in your plan, then the unpaid portion will be considered a distribution and taxed at your regular rate (currently 15%) plus an additional 10% penalty.
Loans from a 401(k) plan aren’t subject to federal income taxes, but they’re limited to 50 percent of the total value of the account (up to $50,000). If you take out more than that, you’ll owe taxes on the difference.
Bottom Line
If you’re under 59.5, then you should definitely not take out any money from your retirement plan. You’ll pay a 10 percent early withdrawal penalty, plus interest on top of that.
If you do take out money, you’ll also lose the opportunity to grow your savings. That means you could end up paying taxes on the money you took out, too.
So, if you really need the cash right away, see whether you qualify to get a hardship withdrawal or a loan against your retirement account.
A 401(k) loan might be a better alternative. It won’t come with the same penalties, but the interest rate is often lower than what you’d find elsewhere.
Tips on 401(k) Withdrawals
- Find out if you qualify for any government assistance programs. You may qualify for some tax benefits, too.
- If you’re thinking about taking some money out of your 401(k), consider borrowing against your house instead. SmartAsset has an online calculator for figuring out how much you’d pay monthly if you borrowed against your home