How To Pull My 401k

Borrowing From A 401 Should Be A Last Resort

Economists recommend tapping a 401 as a last resort. Why?

• A 10% penalty applies if the money is withdrawn early for any reason aside from an approved hardship.
• Consumers have to pull out a larger percentage of assets, as they are worth less during a downturn.
• There will be no compounding during the withdrawal period
• The amounts saved during the first 10 years of investing can account for 50% of the balance by age 65.
• Income taxes will still be owed on withdrawals from traditional 401 deferrals and employer matching.

The ideal scenario would be to tap emergency cash savings. Americans are advised to keep at least three to six months of expenses in a cash savings account for emergencies. Homeowners may consider taking a low-interest line of credit. Personal loans from a local credit union can help consolidate debt or make a big purchase, though the interest rate can be 10% or higher.

Weve only just skimmed the surface of the questions you may face here. Call us for more personalized financial advice about starting, changing, or updating your 401 plan. Ubiquity specializes in working with small businesses.

Borrowing From Your 401k Without Penalty

You may be wondering, how can I use my 401k to buy a house? There are two possible options: 401k withdrawals and 401k loans. Conventional wisdom advises against withdrawing funds from your 401k early. However, borrowing from yourself is different from withdrawing funds permanently and does not incur the same tax penalties as withdrawing funds.

In taking a 401k loan to purchase a home, you wont incur the same penalties. If you fail to repay your loan within the allotted time frame, however, it will be treated as a taxable withdrawal.

Cares Act Lifts Restrictions On 401 Loans

The CARES Act offers relief by loosening restrictions on 401 loans and distributions by:

• Penalty-free distributions allowed Qualified participants can take out up to $100,000 without paying the 10% excise tax for early withdrawal. The distribution is not taxed if repaid within three years.
• Bigger plan loans allowed In the past, plan participants could take out up to 50% of their account balances . Now, qualified participants can take out 100% of their balances . There is no 10% early withdrawal penalty for participants who are under 59.5 years of age. Loan repayment can be suspended until December 31, 2020. Interest continues to accrue, but participants can take up to five years to pay off their loans.

• No required minimum distributions RMDs for those age 72 or over can be waived for the remainder of 2020 to avoid selling at undervalued prices.
• New parents can take money out Americans who just had a baby or adopted a child can take up to $5,000 from a 401 or IRA without the typical 10% penalty. Feasibly, if they have separate retirement accounts, a couple could take up to $10,000 in total. New parents may opt to repay, but the borrowed cash does not have strict repayment protocols in place.

Read Also: How To Close Vanguard 401k Account

Roth 401 Or Roth Ira Conversion

Since you can withdraw from your Roth account without a penalty at any time, you might consider converting your Traditional 401 to a Roth account. You might even have the option to rollover to a Roth IRA, but there are some differences between an IRA and 401. You should check with your plan administrator to make sure this is allowed. Also note that you will be required to pay income taxes when you make the conversion. Since you contribute to a traditional plan with pre-tax dollars and contributions to a Roth plan are with after-tax dollars, you will have to go ahead and pay taxes on those dollars when you perform the conversion. Make sure you have enough cash on hand to cover those taxes. Once the conversion is complete, you will be free to make a withdrawal from your Roth account without any associated penalties.

A 401 Loan Or An Early Withdrawal

Retirement accounts, including 401 plans, are designed to help people save for retirement. As such, the tax code incentivizes saving by offering tax benefits for contributions and usually penalizing those who withdraw money before the age of 59½.

However, if you really need to access the money, you can often do so with a loan or an early withdrawal from your 401 just remain mindful of the tax implications for doing so.

Don’t Miss: How Do I Combine My 401k From A Previous Job

There Are Some Situations In Which It Can Be Advisable To Take An Early 401k Withdrawal

• It may be beneficial to cash out a portion of your 401K if you have a loan that has very high interest. For example, taking an early distribution on your 401K be wise to pay down credit card or personal loan with a very high interest rate. In this case, you may be financially better off cashing out the 401K and paying the penalty than continuing to pay that interest. However, it is important to do the math to determine whether its better to cash out a portion of the 401K or not

Hardships Early Withdrawals And Loans

Generally, a retirement plan can distribute benefits only when certain events occur. Your summary plan description should clearly state when a distribution can be made. The plan document and summary description must also state whether the plan allows hardship distributions, early withdrawals or loans from your plan account.

Recommended Reading: How To Rollover A 401k To Vanguard

To Meet Additional Essential Needs

Money for items such as medical expenses, prescriptions, food, or elder care add up fast. If you do decide pulling money from 401 or other retirement funds makes sense in a disaster scenario, consider taking out only what you need and set up a plan to pay back the amount no later than the three-year time frame.

Recommended Reading: How To Transfer 401k To Bank Account

A Bank Or Credit Union Loan

With a decent credit score you may be able to snag a favorable interest rate, Poorman says. But favorable is relative: If the loan is unsecured, that could still mean 8%12%. If possible, secure the loan with some type of asset to lock in a lower rate.

Interest is the price of borrowing money. Learn how interest rates work.

Don’t Miss: How Much Can I Contribute To My Solo 401k

How Do You Withdraw Money From A 401 When You Retire

After retirement, one of the common questions that people ask is âhow do you withdraw money from a 401 when you retire?â. Find out the options you have.

As you plan your retirement, you should think about how you are going to live off your retirement savings once you are out of employment. You will need to figure out how to withdraw your retirement savings in your 401 post-retirement, and the best withdrawal strategies so that you donât exhaust your retirement savings.

When withdrawing your retirement savings from a 401, you can decide to take a lump-sum distribution, take a periodic distribution , buy an annuity, or rollover the retirement savings into an IRA.

Usually, once youâve attained 59 ½, you can start withdrawing money from your 401 without paying a 10% penalty tax for early withdrawals. Still, if you decide to retire at 55, you can take a distribution without being subjected to the penalty. However, any distribution you take after retirement is taxed, and you must include the distribution as an income when filing your annual tax return.

What Hardship Withdrawals Will Cost You

Hardship withdrawals hurt you in the long run when it comes to saving for retirement. Youre removing money youve set aside for your post-pay-check years and losing the opportunity to use it then, and to have it continue to appreciate in the meantime. Youll also be liable for paying income tax on the amount of the withdrawaland at your current rate, which may well be higher than youd have paid if the funds were withdrawn in retirement.

If you are younger than 59½, its also very likely youll be charged at 10% penalty on the amount you withdraw.

You May Like: Can You Have A Traditional Ira And 401k

Read Also: How To Pull Funds From 401k

What Are The Penalty

The IRS permits withdrawals without a penalty for certain specific uses, including to cover college tuition and to pay the down payment on a first home. It terms these “exceptions,” but they also are exemptions from the penalty it imposes on most early withdrawals.

It also allows hardship withdrawals to cover an immediate and pressing need.

There is currently one more permissible hardship withdrawal, and that is for costs directly related to the COVID-19 pandemic.

You’ll still owe regular income taxes on the money withdrawn but you won’t get slapped with the 10% early withdrawal penalty.

When You Can Borrow

Once you pull money out of your plan, those dollars no longer benefit from long-term market returns.

If you have a pool of emergency funds, itâs best to use that money first. If youâre managing debt, itâs even better to build that repayment into your budget.

Even your boss wants you to keep your hands off your retirement plan savings.

That said, here are three extreme cases that may warrant a 401 loan.

You have an immediate emergency.âSay that you need to meet the deductible on your high-deductible health-care plan, and you have no money in your health savings account,â said Aaron Pottichen, president of retirement services at CLS Partners in Austin, Texas.

He is referring to the tax-advantaged health savings account that individuals may use to cover qualified medical expenses. Itâs also known as an HSA.

You have an urgent cash need, but your credit precludes you from obtaining a competitive interest rate. Ask yourself what you can repay in five years.

You need to pay off high-interest debt thatâs hampering your long-term financial goals. This is the case if the interest rate on your 401 is lower than what your creditor is offering you.

âIf youâre in âpay down debt mode,â itâs all about whatâs your cheapest interest rate and how fast can you get the debt down,â said Pottichen.

You May Like: What Can I Use My 401k For

How To Cash Out A 401 After Quitting

You may follow this type of action plan for your 401 when you quit your job:

Taking Money Out While Still Employed

If you still work for the organization that handles your 401, it may be more difficult to get your money. Some of the most common approaches for pulling funds out of a 401 are listed below.

Before using those options, its worth a reminder that you should do everything you can to avoid dipping into your 401 before retirement. Its hard to rebuild your retirement nest egg, and 401 plans have benefits that other investments might not offer. For example, your 401 assets might be protected from creditors, but cashing out means you lose that protection.

Finally, talk with your Plan administrator about your options and read through your disclosures carefully. This page provides only enough information to get you started. Find out about any fees, tax consequences, and other effects of using these options.

Also Check: How Do I Transfer My 401k To A Roth Ira

Cashing Out Your 401k While Still Employed

The first thing to know about cashing out a 401k account while still employed is that you cant do it, not if you are still employed at the company that sponsors the 401k.

You can take out a loan against it, but you cant simply withdraw the money.

If you resign or get fired, you can withdraw the money in your account, but again, there are penalties for doing so that should cause you to reconsider. You will be subject to 10% early withdrawal penalty and the money will be taxed as regular income. Also, your employer must withhold 20% of the amount you cash out for tax purposes.

There are some exceptions to the rule that eliminate penalties, but they are very specific:

• You are over 55
• You are permanently disabled
• The money is needed for medical expenses that exceed 10% of your adjusted gross income
• You intend to cash out via a series of substantially equal payments over the rest of your life
• You are a qualified military reservist called to active duty

How To Protect Your 401 From A Stock Market Crash

Market volatility is inevitable. Corrections happen every one or two years when stocks decline 10% or more from their most recent peak. These can even last several months at a time. Stock market crashes, on the other hand, are less common than corrections, but are more abrupt and severe. Look no further than the 2008 financial crisis or the 2020 crash ushered in by the coronavirus pandemic. But preparing for market volatility ahead of time is possible. A financial advisor can help you shore up your retirement savings for inevitable market events.

Also Check: Can I Pull Money From My 401k

Withdrawals After Age 59 1/2

Age 59 1/2 is the magic number when it comes to avoiding the penalties associated with early 401 withdrawals. You can take penalty-free withdrawals from 401 assets that have been rolled over into a traditional IRA when youve reached this age. You can also take a penalty-free withdrawal if your funds are still in the 401 plan, and youve retired.

You can take a withdrawal penalty-free if youre still working after you reach age 59 1/2, but the rules change a bit. Check with the plan administrator about its specific rules if youre still working at the company with which you have your 401 assets.

Your plan might offer an in-service withdrawal that allows you to access your 401 assets penalty-free, but not all plans offer this option. And remember, the withdrawal will still be subject to income taxes, even if its not penalized.

Who Is Eligible For Coronavirus

If you, your spouse or a dependent have been diagnosed with COVID-19, you qualify for the above benefits. However, eligibility for coronavirus-related distributions extends well beyond those who have been diagnosed.

According to an IRS notice issued on June 19, qualified individuals include anyone who has encountered adverse financial consequences as a result of the individual, the individuals spouse or a member of the individuals household experiencing any of the following due to COVID-19:

• Being quarantined, furloughed or laid off.

• Having their hours at work cut.

• Having a job offer rescinded or delayed or their income reduced.

• Being unable to work because of a lack of child care.

• Slashing operating hours or shutting down a business due to the outbreak.

This means that if your spouse experiences financial hardship, you may qualify for a coronavirus-related distribution from your retirement account, even if youre still employed.

Also Check: How Do I Find My Fidelity 401k Account Number

Also Check: How To Move A 401k To A Roth Ira

What Qualifies As A Financialhardship

The following reasons qualify as a financialhardship as set forth in the plan document:

• Buying the participants primaryhome
• Post-secondary educational feesfor the next 12 months, including tuition, room and board, and other relatedcharges for the participant or the participants spouse, children ordependents, or the participants primary beneficiary* under the plan
• Unreimbursed medical expenses, forthe participant or the participants spouse, children or dependents, or theparticipants primary beneficiary* under the plan
• Preventing eviction from orforeclosure on the participants primary home
• Burial expenses for theparticipants deceased parent, spouse, children or dependents, or theparticipants primary beneficiary* under the plan
• Expenses to repair damages to theparticipants primary home that would qualify as a casualty deduction underSection 165 of the Internal Revenue Code .

*The primary beneficiary under the plan is theindividual who has an unconditional right to all or a portion of theparticipants account balance upon his or her death.

Because hardship withdrawals can only beapproved by the Plan Administrator, you will need to keep on file theapplicable documentation in the event your plan is audited.

Just Because You Can Cash Out Your 401 Doesnt Mean You Should

Technically, yes: After youve left your employer, you can ask your plan administrator for a cash withdrawal from your old 401. Theyll close your account and mail you a check.

But you should rarelyif everdo this until youre at least 59 ½ years old!

Let me say this again: As tempting as it may be to cash out an old 401, its a poor financial decision. Thats because, in the eyes of the IRS, cashing out your 401 before you are 59 ½ is considered an early withdrawal and is subject to a 10% penalty on top of regular income taxes. Oh, yes, thats another thing: Since the 401 is funded with pre-tax money, you also have to pay taxes on it when you cash out.

In most cases, your plan administrator will mail you a check for 70% of your 401 balance. Thats your balance minus 10% for the withdrawal penalty and 20% to cover federal income taxes .

Its financially prudent to save for retirement and leave that money invested. But paying the 10% early withdrawal penalty is just dumb money its equivalent to taking money youve earned and tossing it out the window.

Don’t Miss: How To Cash Out A 401k Plan