Can You Take an Early 401(k) Distribution?
Are you saving for retirement but need access to your 401(k) plan contributions sooner than expected? Withdrawing your 401(k) funds before the age of 59 ½ may result in penalties; but there are some instances in which you can avoid them. Whether you’re close to retirement or need access to money, this guide will help you understand your options.
What is a 401(k) distribution?
A 401(k) distribution is money taken out of an employee-sponsored retirement account. You can begin to take these distributions starting at the age of 59 ½ without penalties. However, you’re required to take minimum distributions by the age of 73. 401(k) distributions are typically taxable earnings, and the tax amount is determined by your tax bracket.
When can you take a distribution without a penalty?
Taking money out of your 401(k) before the age of 59 ½ can result in penalties. The IRS may impose a 10% penalty for withdrawing before the age of 59 ½.
There are instances in which you can make early withdrawals and avoid facing penalties, including but not limited to:
- Leaving your job after the age of 55
- Qualified Childbirth or Adoption Distributions*
- Distributions to victims of domestic violence*
- Qualified Disaster Recovery Distributions*
- Hardship Distributions*
- Disability
- Transferring money to a separate retirement account (direct rollover)
*distribution option which may not be available in all plans
What is a 401(k) loan?
A 401(k) loan occurs when you borrow money from your own 401(k) and pay it back through scheduled payroll deductions. The maximum re-payment period for 401(k) loans is five years, but you can extend it if you’re looking to purchase your first home with the funds.
Unlike traditional bank loans, 401(k) loans are generally easy to get with no credit check. You’ll paying the interest on the loan (determined by the plan administrator) back to your own 401(k),. Plus, if you borrow against your own money and pay back the loan in a timely manner, you will not be subject to additional income taxes.
Drawbacks of a 401(k) loan
Though a 401(k) loan may seem like a great solution for obtaining necessary additional income, there are a few possible drawbacks to consider:
- Smaller paychecks: Since your loan is repaid through your payroll check, you’ll be taking home less net income.
- Potential for missed earnings opportunity: When the loan amount is distributed from your account, those funds are no longer invested and may be missing a growth opportunity.
- Fees: If you choose to borrow from your 401(k), you may face unforeseen fees for establishment or maintenance of the loan.
- Additional taxes: If you have a current loan against your 401(k), it must be paid back) if you leave your job before the loan is repaid. If it is not repaid, the outstanding amount of the loan and any accrued interest become taxable.
While 401(k) plans are typically meant for retirement purposes, sometimes a need a arises that requires you to withdraw the funds sooner. Whether you’re considering taking out early distributions or a 401(k) loan, it’s important to weigh your options and the potential drawbacks.
For more information on 401(k) distributions, please visit the ePlan Services help center.
This content is for educational purposes only, is not intended to provide specific legal or financial advice, and should not be used as a substitute for the legal advice of a qualified attorney or financial professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.
This content is for educational purposes only, is not intended to provide specific legal or financial advice, and should not be used as a substitute for the legal advice of a qualified attorney or financial professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.