A traditional 401K is a special type of investment account that is specifically intended for retirement savings. Employees can opt to participate in their company’s program and a certain amount will be deducted from each paycheck to be deposited in their own retirement account.
The money is not taxed along with the rest of their income, but receives a special tax-exempt status for being put into this savings account. Employers may choose to match the contributions of their employees up to a certain amount, allowing employees to double the amount of their savings.
While this is a great program for saving money for retirement, individuals who are facing a financial hardship in the more immediate future may want to take the money out sooner. This can become tricky because although the money is technically yours, the tax-exempt status and employer-matching add different restrictions to your access. So, when can you take money out of your 401(k)?
There are four means of getting to your money:
- Major financial hardship. If you are facing foreclosure or you have medical bills that amount to more than 7.5% of your gross income, you can be granted a hardship exception which will allow you to withdraw some of the funds in your 401(k). However, the amount you can access and the penalties assessed depend on your employer’s restrictions.
- Leave your job for another one. When you leave a job where you had a 401(k), you can cash out that account. However, you will be required to pay taxes on the amount that was previously untaxed and additional penalties.
- Quit your job, get fired, or become disabled. If you are over 59.5 years old and quit or are fired, you can access your 401(k) without penalties. If you become permanently disabled, you also can access it.
- Take out a loan using your account as collateral. If none of the previous three situations apply to you, you may be able to take out a loan from a financial institution using the value of your account as collateral. Generally this will be only for a small amount of the total value of the account and you will be charged interest as on a normal loan.
Otherwise, you can start taking money out of your account the year that you turn 59 years old, and you are required to start taking money out by the time you turn 70. There may be additional options available to you depending on your specific circumstances and the rules of your employer’s account. Only a financial professional will be able to offer you advice on your specific situation.