What Reasons Can You Withdraw From a 401(k) Without Penalty?
Dylan Telerski / 19 Jun 2020 / 401(k) Resources
You can make withdrawals from a 401(k) without IRS penalty under several circumstances:
You’re age 59 ½
You’re rolling over your funds
You’ve experienced a hardship
You’re age 59 ½.
The IRS encourages long-term saving and growth by levying a 10% early withdrawal penalty on money taken out of 401(k) accounts prior to participants reaching 59 ½ years of age. However, once you reach that magic number, you can feel free to take withdrawals to cover living expenses and other financial needs.
Keep in mind that you’ll need to pay taxes on the money as you take it out (unless you have a Roth 401(k)), and any money left in will continue to earn tax-deferred or tax-free growth.
You’re rolling over funds.
If you leave, quit, or get fired from the company at age 55 or older, you can cash out that account in a lump sum withdrawal without incurring a penalty.
If you’re under 55 years of age (or if you prefer), you have up to 60 days to rollover your funds to a new 401(k) or IRA without triggering a taxable event. The best way to accomplish the rollover is to transfer the money directly from the old custodian to the new custodian to avoid having 20% automatically withheld for income tax.
If you fail to put the entire amount into a new retirement account within two months, it will be considered a distribution that is not only taxed but penalized if you’re under 59 ½.
You’ve experienced a hardship.
Penalty-free withdrawals are allowed for certain hardships, such as:
- Medical debt that exceeds 7.5% of your Adjusted Gross Income (or 10% if you’re under 65).
- Suffering a permanent disability.
- Court-ordered withdrawal to pay a former spouse or dependent.
- Being called to active duty military service.
Some 401(k) plans allow savers early access to funds to buy a primary residence, pay for educational expenses, cover funeral costs, make necessary home repairs, or prevent foreclosure – but a penalty must be paid. Each plan is different, so it’s important to ask before taking the money out.
Once you take a hardship withdrawal, you’re generally barred from contributing to the 401(k) for at least six months. You will also be limited to the principal funds you’ve contributed, and you will still have to pay taxes on traditional 401(k) funds.
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(just me/or my business partner/spouse)
You agree to substantially equal periodic payments.
Some people choose to retire early once they reach 50. By agreeing to substantially equal periodic payments under Internal Revenue Code Section 72(t), you can withdraw money from your 401(k) once a year for a minimum of five years or until you reach age 59.5 – whichever period is longer.
You may use one of three methods to calculate your payments:
Use IRS life expectancy tables to figure out your life expectancy and divide your account balance by the number of years. This is the easiest method but yields the smallest distribution.
Fixed Amortization Method
Draw down your account value over the course of your life expectancy after applying an IRS-approved interest rate to your account balance.
Fixed Annuitization Method
Use an annuity factor from the IRS mortality table combined with the IRS-approved interest rate.
Contact Ubiquity to inquire about 401(k) plans or if you have questions about making a 401(k) withdrawal.