Withdrawing Money Early From Your 401
The method and process of withdrawing money from your 401 will depend on your employer, and which type of withdrawal you choose. As noted above, the decision to remove funds early from a retirement plan should not be made lightly, as it can come with financial penalties attached. However, should you wish to proceed, the process is as follows.
Step 1: Check with your human resources department to see if the option to withdraw funds early is available. Not every employer allows you to cash in a 401 before retirement. If they do, be sure to check the fine print contained in plan documents to determine what type of withdrawals are available, and which you are eligible for.
Step 2: Contact your 401 plan provider and request that they send you the information and paperwork needed to cash out your plan, which should be promptly completed. Select providers may be able to facilitate these requests online or via phone as well.
Step 3: Obtain any necessary signatures from plan administrators or HR representatives at your former employer affirming that you have filed the necessary paperwork, executed the option to cash in your 401 early, and are authorized to proceed with doing so. Note that depending on the size of the company, this may take some time, and you may need to follow up directly with corporate representatives or plan administrators at regular intervals.
How Much Social Security Will I Get
Your Social Security benefit is based on how much you have earned over your lifetime.
What you collect is based on your Social Security start age. You can start Social Security early at age 62 or as late as age 70. The longer you wait to start benefits, the bigger your monthly pay check will be. The average monthly Social Security benefit is $1,413 . Not sure when to start? Here are15 tips for making the best Social Security decision.
Gift Money After Reviewing The Gift Tax Rules
Beginning in 2018, you can gift up to $15,000 to a person in a year without IRS interfering with your transaction. If you are gifting more than that amount, you need to file a gift tax return. That doesnt mean that you have to pay a tax on the gift. It means that $15,000 is eligible for lifetime exclusion. This is the amount you can gift away during your lifetime without incurring a gift tax. The total lifetime tax exclusion for gifts is $11.2 million per individual so, gift tax rules are not much of a concern for most people.
Don’t Miss: What Will My 401k Be Worth In 20 Years
Withdraw Money From Different Accounts First
Given 401k and IRA contributions are pre-tax contributions, from the governments point of view it makes sense there should be penalties assessed for early withdrawals.
The IRS doesnt like that you havent paid taxes on your contributions and received the benefits of tax-free compounding, yet still want to withdraw funds for some random expense you dont need.
The better practice is to go through the following succession of fund pilfering:
- Borrow money interest-free from a friend or family member
- Cajole your parents into giving you some of your inheritance today
- Take out a personal loan with an interest rate under 10%
- Roth IRA
- 401k or IRA
With the Roth IRA, since youve already paid taxes on your contributions, you can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA if youve held for less than five years.
After youve held the account for five years, you can withdraw up to $10,000 in earnings without penalty or tax for the purchase, repair, or remodel of a first home. In other words, you can withdraw all of your contributions plus another $10,000 from earnings and not pay the 10% penalty or taxes on any of it.
Home Equity Line Of Credit
If you have equity in your home, a home equity line of credit could cost less and allow you to keep money in your 401. This could be one way to get access to a large amount of capital at a low cost. Find out how much you qualify for and check with multiple lenders to get the best rate. Remember, if you cant afford your HELOC payments, you could potentially lose your home to foreclosure. Make sure you understand what youre risking before you move forward.
Also Check: How To Max Out 401k Calculator
Plan To Replace About 80% Of Income
When you stop working, aim to replace about 80% of pre-retirement earnings from all income sources combined, such as 401s and IRAs, Social Security, and pensions.
You can anticipate spending less because youll no longer be paying payroll taxes or making 401 contributions. You may also spend less on things like gas and clothing because youre no longer working. The actual amount youll need in order to replace your working income depends on how frugal or luxurious you want your retirement to be.
When Can You Cash Out A 401
A 401 is a tax-advantaged investment account designed to help you save money for retirement. In return for providing a tax benefit, the government expects you to hold off on accessing the money in your 401 until you are 59 1/2. For many people, a 401 retirement plan is the first exposure to learning how to invest money.
You typically cant cash out or withdraw funds from a 401 thats sponsored by your current employer until you reach age 59 1/2. If youre 59 1/2 or older, you could cash out a 401 from a current employer. If youre younger than age 59 1/2, you could cash out a 401 after leaving a job or if youre disabled.
Some plans also allow hardship withdrawals. If your employer allows hardship withdrawals, the IRS requires that they be due to an immediate and heavy financial need and limited to what you need to satisfy that need.
The IRS considers certain situations to automatically be immediate and heavy financial needs:
Medical care for you, your spouse, or dependents
Costs related to purchasing a primary residence
College expenses for you, your spouse, or dependents
Expenses to prevent eviction or foreclosure
Funeral expenses for you, your spouse, or dependents
Expenses to repair damage to a principal residence
Your employers plan administrator may require a written explanation that covers why that need cant be met by other sources such as insurance.
Recommended Reading: How To Rollover Old 401k To New 401k
The Net Effect Is Less For You In Retirement
A 401 loan today can mean a big reduction in what you have to live on in retirement. You might either have to work more years to make up for it or be in near-poverty during retirement.
Even though the interest rate on that 401 loan seems really good, the problem is that you are devastating your future. You are taking money out of that account that you will never recover, Clark says.
Recommended Reading: How To Claim 401k Money
Withdrawing Money From A : Taking Cash Out Early Can Be Costly
An unexpected job loss, illness or other emergencies can wreak havoc on family finances, so its understandable that people may immediately think about taking a withdrawal from their 401. Tread carefully as the decision may have long-range ramifications impacting your dreams of a comfortable retirement.
Taking a withdrawal from your traditional 401 should be your very last resort as any distributions prior to age 59 ½ will be taxed as income by the IRS, plus a 10 percent early withdrawal penalty to the IRS. This penalty was put into place to discourage people from dipping into their retirement accounts early.
Roth contribution withdrawals are generally tax- and penalty-free contribution and youre 59 ½ or older). This is because the dollars you contribute are after tax. Be careful here because the five-year rule supersedes the age 59 ½ rule that applies to traditional 401 distributions. If you didnt start contributing to a Roth until age 60, you would not be able to withdraw funds tax-free for five years, even though you are older than 59 ½.
You May Like: Is It Good To Invest In 401k
Motivation To Not Withdraw Funds From A 401k
Every time youre tempted to borrow from your 401k, take a look at this chart below. It shows you when you will become a 401k millionaire based on various portfolio allocations and return assumptions.
Not only is paying a 10 percent penalty painful for a hardship withdrawal, so is losing out on years of compounding.
Withdrawals After Age 72
Many people continue to work well past age 59 1/2. They delay their 401 withdrawals, allowing the assets to continue to grow tax-deferred. But the IRS requires that you begin to take withdrawals known as “required minimum distributions” by age 72.
Those who are owners of 5% or more of a business can defer taking their RMDs while they’re still working, but the plan must have made this election. This only applies to the 401 of your current employer. RMDs for all other retirement accounts still must be taken.
You May Like: What Happens To 401k During Divorce
Best Places For Employee Benefits
SmartAssets interactive map highlights the counties across the country that are best for employee benefits. Zoom between states and the national map to see data points for each region, or look specifically at one of four factors driving our analysis: unemployment rate, percentage of residents contributing to retirement accounts, cost of living and percentage of the population with health insurance.
Debt Relief Without Closing My 401k
Before borrowing money from your retirement account, consider other options like nonprofit credit counseling or a home equity loan. You may be able to access a nonprofit debt management plan where your payments are consolidated, without having to take out a new loan. A credit counselor can review your income and expenses and see if you qualify for debt consolidation without taking out a new loan.
Don’t Miss: How To Find Out Whats In Your 401k
What Other Options Are There If You Need Cash
- If you have a Roth IRA for five years, you can withdraw your original contributions at any age, free of federal taxes and penalties.
- For education expenses, explore scholarships or student loans. You can borrow for school but not for retirement.
- You can borrow against the value of your home with a home equity loan or home equity line of credit.
Microsoft Makes A Big Move Into Ai
Yellen adds there are many strings attached to borrowing from a 401 plan, including how much you can borrow, what you can borrow it for and how and when you must pay it back. “And if you leave your job for any reason, you’ll typically have to pay the loan back in full, with interest, within 30 to 60 days or you’ll owe taxes and penalties,” Yellen says. “And you thought it was your money!”
Here’s how a 401 loan can set you back financially, in ways you probably haven’t considered.
Also see: Companies to Workers: Financially, You’re On Your Own
Also see: Companies to Workers: Financially, You’re On Your Own> >
If you take out a loan from your 401 and can’t pay it back, you’ll be on the hook for taxes with the IRS, plus get socked with an extra 10% penalty if you’re younger than 59.5, the age at which you’re allowed to make an early withdrawal. “In most cases you’re required to pay your loan back in full with interest in 30 to 60 days, or you’ll have to pay income taxes on the money you borrowed plus a 10% penalty,” Yellen says.
If you absolutely have to take out a loan out to prevent against a financial catastrophe such a home foreclosure or from having your car repossessed, go ahead just make sure you structure the loan in a way you can manage to pay it back, avoid denting your 401 plan too much and avoid IRS tax penalties.
By Brian O’Connell
Recommended Reading: Is It Better To Rollover 401k To Ira
You Probably Can’t Take Out A Loan Directly From Your Old 401 But There Are Alternatives
A 401 is the most common type of retirement plan offered by private-sector employers, and many of these plans offer the ability to take out a loan against the assets in your plan. However, this can be challenging to do once you no longer work for the employer sponsoring the plan. Here’s what you need to know about post-employment 401 loans, and other options that may be available.
The short answerMost, if not all, 401 plans do not allow former employees to take out loans from their accounts, and actually require that any previously outstanding loans be paid back within a short period of time after leaving employment.
It’s easy to understand why — after all, while you’re receiving paychecks, the “lender” is guaranteed that you’ll repay your 401 loan as agreed. Once you’re no longer receiving those paychecks, you become much more of a credit risk. In fact, about 10% of borrowers default on 401 loans, primarily because of a job change.
While you’re technically borrowing the money from yourself, there are still legal reasons why you need to pay it back. Specifically, the tax benefits you get with a 401 are based on the assumption that you’ll leave the money alone until you retire. If you fail to pay back a 401 loan, it’s considered to be a distribution, and you’ll face the same taxes and penalties as if you simply withdrew money.
In short — 401 loans are generally made exclusively to current employees.
What To Ask Yourself Before Making A Withdrawal From Your Retirement Account
There are many valid reasons for dipping into your retirement savings early. However, try to avoid the mindset that your retirement money is accessible. Retirement may feel like an intangible future event, but hopefully, it will be your reality some day. So before you take any money out, ask yourself: Do you actually need the money now?
Think of it this way: Rather than putting money away, you are actually paying it forward. If you are relatively early on in your career, your present self may be unattached and flexible. But your future self may be none of those things. Pay it forward. Do not allow lifestyle inflation to put your future self in a bind.
With all this talk of 10% penalties, and not touching the money until youre retired, we should point out that there is a solution if you feel the need to be able to access your retirement funds before you reach age 59 ½ without penalty.
Contribute to a Roth IRA, if you qualify for one.
Because contributions to Roth accounts are after tax, you are typically able to withdraw from one with fewer consequences. Keep in mind that there are income limits on contributing to Roth IRAs, and that you will still be taxed if you withdraw the funds early or before the account has aged five years, but some people find the ease of access comforting.
For some folks, however, a Roth-type account is not easily available or accessible to them.
Also Check: How Do I Rollover My 401k To My New Job
How Do I Get My Money Out Of My Retirement Plan
You retirement account is part of a retirement plan. Retirement plans operate according to the terms and features specific to the Plan Document which was adopted by the plan sponsor . To best understand how the plan operates, read the Summary Plan Description , and speak with your former employer or Third Party Administrator . The two most frequently asked questions are, How do I put money in to the plan? and How do I get money out of the plan? The most frequently asked questions below address questions related to how to get money out of the plan, after you no longer work for the company who sponsors the plan.
I NO LONGER WORK FOR THE COMPANY, HOW DO I GET MY MONEY OUT OF MY RETIREMENT PLAN?
- Your prior employer will forward the distribution paperwork to their Third Party Administrator who will prepare the paperwork required to close your account.
HOW LONG DO I HAVE TO WAIT FOR MY MONEY?
It may take several months to finalize your distribution. The reason for the lengthy process depends on:
DO I HAVE TO CLOSE MY ACCOUNT, ONCE I AM TERMINATED FROM EMPLOYMENT?
The answer to this question depends on the amount of your account balance and the terms of the Plan Document. Generally speaking, if your account balance is over $5,000, you may leave your account as is.
Build More Passive Income Through Real Estate
One way to prevent yourself from withdrawing funds from a 401k or IRA is by developing perpetual passive income streams. One of the best ways to generate passive income is through real estate. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Read Also: Does Fidelity Offer A Solo 401k