When can I take money out of my 401k?
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M$2 Answers
For traditional plans, the employer is allowed, but not required to provide for employees to borrow against their 401(k) balance, or to withdraw money outright due to specifically defined hardships. These include medical expenses you have to pay on behalf of yourself, your spouse or a dependent, and which are not reimbursed; purchase of your principal residence or certain repairs of such; certain college expenses for you, your spouse, your dependents, or your non-dependent kids, including tuition, room, and board for up to the coming 12 months; payments you must make to prevent foreclosure of or eviction from your home; funeral expenses.
Loans, even when offered, may be limited to a certain dollar amount and/or a maximal fraction of your balance. Both loans and hardship withdrawals may also require a certain number of years since opening the account, vesting, etc. Employers may also limit your ability to borrow or withdraw any amounts that were an employer match, or otherwise provided by the employer without reducing your salary.
Hardship withdrawals also require that they be due to immediate and significant need, only for the part of the need that cannot be covered from other sources available, be for the part of the need that's in excess of any non-taxable loans you can get from the plan. You will not be allowed to contribute to the 401(k) for 6 months following the withdrawal. You will be taxed for the withdrawal as part of your income that year, and if you're under 59.5 years old, will also need to pay a 10% penalty. The penalty and taxes can be included in the amount of the "need". You do not need to pay back the withdrawal, but if you borrow, you will need to pay it back, and if you leave employment, the entire balance will be due immediately.
For Roth 401(k) there are some special attributes that can be seen at http://www.irs.gov/retirement/article/0,,id=152956,00.html#distns . These include withdrawals being allowed once you reach 59.5 years of age, and having had the account open 5 years, or if the withdrawal is due to your disability. According to the above IRS page:
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Since an employee makes designated Roth contributions from after-tax income, can the employee make tax-free withdrawals from his or her designated Roth account at any time?
No, the same restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth contributions. If a plan permits distributions from 401(k) or 403(b) accounts because of hardship, an employee may choose to receive a hardship distribution from his or her designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless the employee has had the designated Roth account for 5 years and is either disabled or over age 59 ½.
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M$If your 401k is a traditional IRA, there will be penalties if you withdraw any money before the age of 59½. My coworker used money from her 401k (which was a traditional IRA) to pay for an emergency, and essentially was only able to withdraw about half of what was in her 401k - the rest was taken as a penalty tax. There are situations in which you can withdraw money from your 401k without penalty, such as hardships (having to pay for rent to avoid eviction, etc), but 99% of the time you will be penalized.
If your company's 401k is a ROTH IRA, you can withdraw money at any time. You can convert your 401k to a ROTH IRA, but I would ask your company's advisor about potential fees before doing so.
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M$
Oh, I see. I thought 401ks differed from individual retirement plans only by the fact that you get a company match. Looks like I have a lot to learn. (I'm getting my first retirement account in June.) :)
One significant difference is that with a Roth IRA, once the account has been open 5 years, you can withdraw all amounts you put in (but not earnings) with no tax (those have already been taxed), no penalty, and no authorization required.
You are confusing a 401(k) which is a company-sponsored, defined contribution retirement plan, with an IRA which is an individual retirement arrangement.
