Can You Take Money Out of Your 401k?
Looking For a 401k Distribution?
If you are looking to take money out of your 401k you need to know a little something about the rules that pertain to taking money out of your 401k.
There are several ways to take money out of your 401k depending on your plan design, your age, and your employment situation. We'll touch upon the most common ways here.
A Word About Your Plan
A 401k plan has several options when it comes to allowing participants to take out money. Among those options are whether you can take a loan, whether you can take a hardship distribution, whether you can get paid out in installments or an annuity, and at what age you are considered to be "retired" according to the plan.
All of these variables will matter when you are trying to determine your ability to take money out of your 401k. The only way to know what your plan allows is to look at your plan. You should have been given a document called a summary plan description which will tell you the answer. If you don't have that, ask your employer or your plan's record keeper for a copy.
Taking a Loan From Your 401k
One option to take money out of your 401k is in the form of a loan. A 401k loan is a loan made to you by you. Your plan assets are sold and the cash goes to you. In return, you pay yourself back in periodic installments. Your payments include principal plus interest, all payable to you.
If your plan allows loans you will have a loan minimum and maximum amount, commonly $1,000 and $50,000, respectively. You will be able to borrow 50% of your vested balance up to the plan maximum.
Your loan must be paid within 5 years unless it is for a primary residence. Then, if your plan allows, you may be able to extend payments up to 30 years.
A loan is tax free and comes with no penalty. Be careful, however, because if you don't make payments it will be a 401k loan default and you will pay not only taxes but an extra 10% penalty if you are less than 59.5 years old.
Taking an In-Service Distribution
If your plan allows, you might be eligible for an in-service distribution. If you are 59.5 years old you can then take a distribution from the plan and, since you are that age, you won't be assessed the 10% penalty that would apply on the loan default.
However, you will pay taxes on your distribution, unless the money was from a Roth or after-tax contribution.
If your plan doesn't allow for an in-service distribution, you will not be able to take your money (as long as you stay employed) until you reach the plan's retirement age. While that is commonly age 65, it is a plan option to make it lower, so check your plan to see what the age is.
At the plan's retirement age you can take money from the 401k. You will pay taxes on your distribution unless the money is from a Roth or after-tax source.
Termination of Employment
Even if your plan does not allow loans, in-service distributions, and you are not yet retirement age there is one more option. Termination.
Of course, you would not want to terminate just to take money from your 401k, but if you are no longer employed by the company that sponsors your plan you can take a distribution at any time.
If you do anything other than rollover the funds to another plan or IRA, you will pay taxes on the distribution unless the money was from Roth or after-tax. In addition, if you are not yet 59.5 years old you will also pay a 10% penalty when you complete your tax return.
If you are no longer employed and don't want to take the cash but are looking to move the money to your own account instead of keeping it in your former employer's plan, a 401k rollover may be for you.
Before you do this, study the fees. In some cases an IRA will cost more than a 401k. However, in an IRA you can get just the investment choices you want to match your investment style, so the move may be well worth it.
An IRA is also a great way to consolidate balances from more than one 401k plan or retirement source to simplify your retirement planning.
Should You Take Money From a 401k?
While one or more of these options may exist for you, the real question is whether you should take money from your 401k at all. The answer is usually no.
Your 401k money is there for you in retirement. The best way to grow your 401k balance is to leave it in the plan. A rollover to a better plan is also a fine option.
Unless you have a serious need, all other distribution types should be thought about carefully.