401k Withdrawals - the Three Options

401k plans were constituted by the US Government in 1980 to help employees put aside money for their retirement. But many applicants have taken 401k withdrawals to utilize this money before retirement. These 401(k) plans were set up specifically with provisions for hardship withdrawals, with the understanding that in some unlikely situations the 401(k) participant may need to access these funds. However, getting money out of your company's 401(k) plan is problematical before you reach the official distribution age of 59½. If you want to make 401(k) early withdrawals before reaching the official age of retirement, you have the following three options.

401k Early Hardship Withdrawals:

While you are employed by the company that offers a 401(k) plan, you usually have an opportunity to access savings under certain hardship conditions. The trouble with meeting the requirements for this provision is nevertheless tough. Just like the IRS has a list of qualifying financial hardships, such as health expenses and disability, individual employers may also add requirements to their plans. What makes it more complicated is the fact that you have to meet the requirements under both sets of rules. This implies that your organization may not even allow the 401k hardship withdrawal, despite the fact that the US government has a clause for it. Payment of a 10% fine of the amount you withdraw is another glitch if a withdrawal is taken before the official retirement age of 59½. Additionally, income tax would be enforced on the money you withdraw. As such, 401k withdrawals can prove costly when combining the potential penalties and income tax. The probability of you taking home only $5,000 after paying federal tax, income tax, and the penalty on a $10,000 401k withdrawal is very high.

401k Non-hardship Withdrawals:

Not every 401k plan permits a non-hardship withdrawal. There is a possibility for you to make a 401k early withdrawal and reallocate it according to your wishes – if your 401k plan allows you to do so. These non-hardship withdrawals are generally called in-service 401k withdrawals. You can roll these funds into an IRA if this feature is available. Generally, with lower administrative fees in an IRA, you end up having a wide variety of investment alternatives. 401k withdrawal payments made directly to the owner of the 401(k) must be reinvested in a qualified plan or IRA within 60 days or you can be faced with a 10% penalty if under age 59½ plus the income tax. In-service withdrawals are used primarily when the participant is unhappy with the 401k plan investment choices and desires to move the funds to their own IRA.

401k Loans:

A 401k loan may be the only choice left for you if you are in a situation where you do not have any other economic options. A loan from your 401k lets you to borrow the money against your account. Your firm's plan may not permit loans even though the government has a clause for them to be included in the 401k plan. The loan must of course be paid back, usually within five years, and loans cannot be rolled over into an IRA. Generally, you will be given a short notice of one or two months to refund the loan if you haven't refunded the 401k loan and left the firm. If you do not repay the loan when due, the loan will be taxed and you will have to pay the potential early withdrawal penalty (if under 59½.