How To Pull Money From Your 401k – But clearly one of the biggest disadvantages is that you are not allowed to access your money for years or even decades. If you try to take it out earlier than you will have to pay a penalty!
What if life gets tough and you need to pull out the money for some kind of emergency?
How To Pull Money From Your 401k
Or what if you’ve done a great job managing your finances and would like to retire early? How can you deal with this problem and get early access to your savings?
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Don’t worry The IRS knows that sometimes life can throw you curveballs, and because of that they’ve made several exceptions where it’s okay to make a withdrawal without paying a penalty.
For those people dealing with difficulties in their lives, these exceptions will allow them to use their retirement savings rather than looking for other less desirable alternatives such as credit cards or high interest loans.
If you’re planning to retire early, then you’ll also be able to use some of these strategies to start enjoying free withdrawals from your 401(k) and IRA.
Generally, the IRS says that age 59 ½ is when you can withdraw your money from a 401(k), IRA or any other similar tax-deferred retirement savings account. Otherwise you will have to pay a hefty 10% penalty.
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Age 59 ½ is when the IRS says withdrawals (or distributions) from these types of accounts become “qualified.” Therefore, withdrawals before this age would be considered “non-qualified” and subject to the 10% penalty. To illustrate this, for every $10,000 you withdraw early, you would lose $1,000 to this early withdrawal penalty.
This is why so many people associate age 60 (or older) with retirement. They hear about the early withdrawal penalty and automatically assume they have to wait until they are at least 59 ½. But as you will find out in the rest of the article below, there are many ways around this penalty before your 60s.
The answer: It depends. While you’re still working, you should apply for something called “working withdrawals” to start taking your money out. Then it would depend on the rules of your employer’s plan if they will allow it or not.
In contrast, with an IRA, you can start making penalty-free withdrawals after age 59 ½ without anyone’s permission. This is because your IRA is between you and your financial service provider; not your employer.
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If you have a Roth 401(k) instead of a traditional 401(k), in addition to waiting until age 59 ½, one more requirement you’ll need to be aware of is that you must have contributed to the plan at some point. at least 5 years. Otherwise the distribution will not be qualified and you will owe the 10% penalty.
So let’s say you start work at age 56 and contribute to a Roth 401(k). You will now have to wait until age 61 to start taking no-effort withdrawals.
Again, you absolutely do not need to always wait until age 59 ½ to begin withdrawing from your 401(k), IRA, or other retirement savings accounts. There are many ways around this rule, and I’ll teach you how!
In fact, as someone who is determined to achieve financial freedom, I was so interested in this topic that I researched it for years and compiled everything I learned into an e-book called “How to Unlock Your Savings By Age 59 ½ With No Penalty”. If you would like to retire early, please check it out to learn a lot more about how each of these strategies could work better for you.
What You Need To Know About 401(k) Loans Before You Take One
One of the classic and temporary options for taking money out of your 401(k) without penalty is to simply borrow from it with a loan. (Yes, you are actually borrowing from yourself.)
Assuming your 401(k) plan allows loans (not all do), the IRS says you’re allowed to borrow the lesser of $50,000 or half of your own account balance. Then, you will have to pay it back with interest in no more than 5 years.
While borrowing against your 401(k) can be beneficial if you have serious financial problems, it’s important to remember what you’ll be giving up. Once the money is removed from a 401(k), it is no longer there to compound and grow. While this may not sound like a big deal now, it could be very significant in the future when you are ready to retire.
For example, imagine you are 60 years old and have saved $1,000 each month for retirement for the past 35 years. At a rate of 7%, you’d have $1,801,055. But wait… What if you lost 5 years of compounding power because you took out a loan against your 401(k)? Now your savings would only grow to $1,219,971. Big difference!
Will You Penalized For Taking Money Out Of Your 401k?
An IRA doesn’t allow you to take out a loan the same way 401(k) plans do. With an IRA, you are allowed to withdraw your money for up to 60 days. Although this is generally intended to be time for you to transfer from one financial provider to another, some people will also use this rule to treat it as a type of short-term loan.
Again, everyone knows that sometimes “life” happens. You get hurt, someone in your family gets sick, you have to send the kids to college, your house gets damaged, etc.
The IRS knows these things tend to happen. So rather than forcing people to seek some kind of immediate but undesirable financial relief such as credit card debt or high-interest loans, they have approved several circumstances where penalty-free withdrawals are okay.
If you plan to withdraw this money from your 401(k) instead of your IRA, remember that it will first have to be allowed by your employer’s plan. Check with your human resources department to know for sure.
Can Your 401(k) Impact Your Social Security Benefits?
If you’d like to retire and are just a few years away from age 59 1/2, then you’re in luck!
When it comes to 401(k) and 403(b), the IRS has a special exception known as the Age 55 Rule, where you can start making no-effort withdrawals starting the year you turn 55.
Unfortunately, if you have 401(k) plans around your old job(s), these won’t qualify for withdrawal because you technically left before age 55. But here’s a tip: Roll those old funds into your current one 401.(k) or 403(b) so that they become part of your total balance. Just be sure to do it before you leave your current job.
When it comes to a Roth IRA, one helpful benefit is that the contributions (the money you put in) can be withdrawn whenever you want. Why is this allowed? Because technically you’ve already paid taxes on them.
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Therefore, if you need to withdraw these contributions for an emergency or to bridge the years between when you retire early and age 59 1/2, then you will be able to do so.
What is not allowed for withdrawal is the earnings portion of your Roth IRA (the money that grew over the money you put in). Since you never paid taxes on these earnings and it is still before age 59 1/2, they would be subject to the same 10% penalty for non-qualified distributions.
Unlike a Roth IRA, withdrawing your Roth 401(k) contributions before age 59 1/2 is not as simple.
When you make an early withdrawal from a Roth 401(k), the entire withdrawal is treated on something called a “pro-rata basis.” What does that mean? It means that your withdrawal will be considered a mix of qualified versus non-qualified; your contributions and earnings.
When Can You Withdraw From Your 401(k), Ira, And Other Retirement Funds?
As you might guess, the IRS will expect you to pay taxes on the earnings portion (non-qualified) and no taxes on the contribution portion (qualified).
Another helpful way to take free withdrawals from your IRA or 401(k) is to use a little-known IRS exemption called 72(t).
Under section 72(t) of the IRS tax code, you are allowed to make what are called “series of equal periodic payments” or SEPPs. These SEPPs can be calculated using one of three methods:
Once you start a SEPP, you will need to continue making these payments for at least 5 years or until you turn 59 1/2, whichever is greater. So plan conservatively so you don’t run out too soon!
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Be sure to work with a tax professional to help you calculate and document your SEPPs correctly. If you withdraw the wrong amount, it could mean a penalty.
Although SEPPs are allowed for both an IRA and an employer-sponsored plan such as a 401(k) or 403(b), you may find that an IRA is easier to work with. Remember that when it comes to employer sponsored plans, your employer (the plan administrator) must allow these types of withdrawals. From personal experience, I discovered that my old employer did NOT allow SEPPs. So what is the job? When you leave your employer, roll your 401(k) into a traditional IRA. Once the money is in the IRA, it will be under your control, and you are then free to do
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