How To Withdraw 401K Money With No Penalty

By Jay White

June 7, 2015   •   Fact checked by Dumb Little Man

The purpose of a 401(k) loan is to pay for retirement expenses, not present-day bills. Due to the design of the loan, individuals younger than 59 years of age will be required to pay a 10 percent penalty should they withdraw money before they reach the age of retirement. However, in certain cases, you may be able to withdraw 401(k) money without penalty or extra fees.

One option is to temporarily withdraw money by taking out a loan from your 401(k). While this might not be an option with your particular plan, if yours allows loans, you will likely be entitled to borrow half of your plan’s balance or $50,000, whichever is smaller. However, you will be required to pay back the money with interest, and if you leave your job, you will need to pay back the entire amount within a specified timeframe in order to avoid added fees and costs.

You may also be eligible to use money from your 401(k) to pay for medical bills if these expenses exceed 10 percent of your adjusted gross income. While you are not required to itemize deductions in order to take advantage of this, the IRS does state that you may only withdraw money in the same year that you incurred the medical expenses. If you’re permanently disabled, you may also use funds from your 401(k), but the IRS may request proof of your disability, and you will then need to provide copies of your disability payments from an insurance policy or from Social Security.

In other instances, you may have early access to your 401(k) if you were fired or quit your job and you are relatively close to the age you would be able to use this money anyway. In other words, if you are over the age of 55 and you’ve left your job, you can generally withdraw 401(k) money without penalty. The age restrictions drops for individuals over the age of 50 in public safety jobs such as firefighters or policemen and women.

Consult IRS rule 72(t), which permits early withdrawals from your 401(k) based on your anticipated life expectancy. You will need to withdraw a specified amount annually until you turn 59 ½ or for at least five years, whichever is greater. For instance, if you are 53 when you take advantage of rule 72(t), you will need to withdraw a certain amount for 6 ½ years. This rule is not used very often, and younger workers who would have to take these specific payments for an extended period of time are not likely to be attracted to this method. You will also be required to pay the appropriate taxes based on your tax bracket.

Jay White

I started Dumb Little Man many years ago so great authors, writers and bloggers could share their life "hacks" and tips for success with everyone. I hope you find something you like!

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