“I need my 401k money now!” – There are a variety of ways through which employees withdraw 401k retirement savings accounts. The 401(k) retirement savings plan allows you to save for your retirement with your and your employer’s contributions. If you have an unexpected expense before your retirement or if you have already reached your retirement age, you can opt for “Early Withdrawal 401k.” 

In this article, you will learn about how to withdraw from a 401k retirement savings account. We will share with you the best ways of withdrawing money from the 401(k) account. However, before you learn the best ways to withdraw, you will need to learn in which cases you are allowed to cash out 401k. Hence, to learn more, read on through to the end of the article.

Can You Withdraw Early From Your 401(k) Account?

Yes, you can. But only if your employer allows the withdrawal. However, you can withdraw only if your age is less than 59.5 years. Despite that, we do not recommend you withdraw your 401(k) account money. This is because if you make an early withdrawal, it can permanently deplete your retirement savings. Furthermore, a 10% penalty is levied on the withdrawal, and along with it comes a big income tax bill.

Furthermore, you have to realize here that not every employer allows you to withdraw your 401(k) account. Hence, the first thing that you need to do to withdraw is to check with your company’s HR department on whether the option is available to you or not.

If your employer allows you, you will also have to decide on the way in which you will withdraw your money from the 401(k) account. You will need to fill out some necessary paperwork and send some requested documents as well. 

Here is what Investopedia recommends you in this regard –

“The paperwork and documents will vary depending on your employer and the reason for the withdrawal, but when all the paperwork has been submitted, you will receive a check for the requested funds, hopefully without having to pay the 10% penalty.”

Unless you have a Roth savings account under 401(k), you will have to pay income taxes while you are trying to withdraw. This is because, in the case of the Roth accounts, the contributions are taxed beforehand.

401k Early Withdrawal Penalty

According to an article on BankRate.com, “Unfortunately, the U.S. government imposes a 10 percent penalty on any withdrawals before age 59 1/2. However, some early distributions qualify for a waiver of that penalty — for instance, certain types of hardships, higher education expenses, and buying a first home.”

However, there are exceptions available, for which you will get to withdraw without paying a penalty:

• If you withdraw from traditional 401(k) plans, your pre-tax contributions will be taxed at ordinary income rates.
• If you have nondeductible contributions, your withdrawal from 401(k) plans is not applicable for the same taxes as deductible contributions. However, an employee will still incur taxes on the earnings that they withdrew from the accounts.
• If you have made Roth 401(k) contributions, you can take out your 401(k) money anytime if you are less than 59.5 years old, without paying any penalties and taxes.

How To Withdraw From 401k Accounts? – A Few Alternatives

It is always recommended that you withdraw your 401(k) money as a last resort if you are looking to withdraw before your retirement. However, if the withdrawal is really necessary, here are some of the major ways through which you can withdraw your money from your 401(k) account:

1. Withdraw Early

If you have an unplanned expense or an investment opportunity outside your retirement plan, you can take an early withdrawal. Whatever the reason, if you are not 59.5 years old, you should consider this withdrawal as a last resort. This is because you will get a 10% penalty on top of normal income taxes on the withdrawal.

SmartAsset.com gives an easy example – “Consider the consequences of a 30-year-old withdrawing just $5,000 from his 401(k). Had the money been left in the account, it alone would have been worth over $33,000 by the time he turns 60. By withdrawing it early, the investor would forfeit the compound interest the money would accumulate in the years that follow.”

Hence, you can see from here that not only do you have to pay a 10% penalty plus income taxes, your 401(k)’s future returns will be diminished as well.

2. Withdrawing Due To A Hardship

If you qualify for a hardship withdrawal, you will not need to pay a 10% early distribution tax. However, you will need to qualify as per IRS’s definition – “an immediate and heavy financial need.” Whether you are eligible for such a withdrawal is fully dependent on your own 401(k) plan. Read this article to check whether you qualify for a hardship withdrawal or not.

3. Loan From 401k

If you borrow a loan from your 401(k) account, you will not need to pay the penalty or the income taxes. However, you will still need to repay the loan with interest within five years. Basically, you are repaying yourself. The best part is that the loan does not affect your credit report in any way. There are penalties if you do not repay the loan, for which you will pay income taxes and the penalty.

Wrapping Up

Hope this article was helpful for you to get an idea of how to withdraw from 401k. However, it is recommended that you withdraw from your 401(k) account only when there are no options left. Let it always be the last resort. If you are under 59.5 years old, you will have to pay a penalty of 10% plus income taxes.

However, you will not have to pay a penalty if you are permitted under certain limited circumstances. But you will still need to pay income taxes regarding the same. What are your opinions regarding the 401(k) withdrawal rules? Share your opinions in the comments section below.

Read Also:

• Form 941 – How To File Quarterly Tax Returns?
• 1099 Form – Let’s Learn What Is It? What’s Its Usage?
• Form 944, Employer’s Annual Federal Tax Return – Let’s Understand