401k Withdrawals

Nov 3rd, 2008 | Filed under: Investing Moment, Video

Generally speaking, you can start taking distributions from your 401(k) plan when you reach age 59½—but what if you want to take withdrawals earlier?

Uncle Sam is waiting to tax your money, and when he does, your nest egg may not be quite so plump. Twenty percent of your savings will be withheld immediately to pay federal income taxes, and you’ll have to pay any remaining federal taxes, as well as state and local taxes, when you file your taxes return. If you’re under age 59½ and still working, you may also be subject to a 10 percent early-withdrawal penalty.

Sometimes, however, you may have an emergency and need some extra cash. To help you in these times, 401(k) regulations allow for early withdrawals in a number of ways.

First, if your plan allows it, you can take a loan from your 401(k) account. There are limits as to how much you can borrow and how long you have to pay back the money, and you still have to pay interest—but at least you pay interest to yourself, not to a bank.

Second, you may be able to take what’s called a hardship withdrawal from your 401(k) plan, depending on your plan rules. Hardship means you need the money due to an immediate and severe financial need—to pay medical expenses, for example, or prevent foreclosure on your home. The bad news is, hardship withdrawals can be costly. At minimum, you’ll have to pay taxes on the withdrawal at your current income tax rate. In some cases, you may also have to pay an additional 10 percent penalty.

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