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How To Take Money Out of a 401k Plan

Avoid Costly Mistakes When Taking Money Out of Your 401k Plan

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The best way to take money out of your 401k plan will depend on three things:

  • Your age
  • Whether you are still working for the company that sponsors your 401k plan
  • Your 401k plan’s rules

How to Take Money Out of a 401k Plan When You Are No Longer Employed There

If you are no longer employed by the company that sponsored your 401k plan, the first thing to do is contact your 401k plan administrator or call the number on your 401k plan statement and ask them for the paperwork you will need to take money out of the plan.

Since you are no longer employed there, you cannot borrow money in the form of a 401k loan, or take a hardship withdrawal. You must take a either a distribution or rollover your 401k to an IRA.

Any money you take out of your 401k plan will fall into one of the following three categories, each with different tax rules:

  • Regular 401k withdrawal – this applies if you are no longer working for the employer that sponsored the 401k plan, and you are over age 59 ½, (or in some cases over age 55, as long as you were 55 or older at the point you retired from that employer). With a regular 401k withdrawal you will pay income tax on the amount you take out, but no penalty tax will apply. Read 401k Retirement Age – Different Rules Apply at Different Ages to learn about the age cut offs that determined the difference between a regular 401k withdrawal and an early distribution.

  • Early 401k distribution – this applies if you are not yet age 59 ½, (or don’t’ qualify for the age 55 regular withdrawal) and are no longer working for the employer that sponsored the 401k plan. You will pay income taxes and a 10% penalty tax when you take money of your 401k plan as early distribution. If you are cashing out of your 401k plan early due to creditor or debt issues, think twice. Your 401k assets are protected from creditors. Read What to Know Before You Cash Out Your 401k Plan before you decide what to do.

  • 401k Rollover to IRA – you can rollover your 401k account balance to an IRA account at a company of your choice. You pay no taxes if you do a rollover to an IRA account, and your money can stay in your IRA account for your later use. Then you can withdraw amounts from your IRA only as you need it, so you will only pay taxes on what you withdraw each year.

How to Take Money Out of a 401k Plan When You Are Still Employed There

Some 401k plans do not allow you to take money out of the plan while you are still employed there. Other plans offer a few choices such as a 401k loan, hardship withdrawal or in-service distribution.

  • 401k Loan – many 401k plans allow you to take money out of the plan through a 401k loan in which you borrow against your account balance. The maximum amount of the loan is usually $50,000 or half of your vested 401k account balance. Not all 401k plans allow this option. You will need to check with your 401k plan administrator or call the number on your 401k plan statement to see if they allow this.

  • 401k Hardship Withdrawal – some 401k plans allow you to take a hardship withdrawal if your circumstances qualify under the hardship provisions. Not all 401k plans allow this option. You will need to check with your 401k plan administrator or call the number on your 401k plan statement to see if they allow this.

  • In-Service Distribution – a few 401k plans allow you to take money out of the plan while you are still employed by using something called an “in-service distribution”. Not all 401k plans allow this option. You will need to check with your 401k plan administrator or call the number on your 401k plan statement to see if they allow this.

How to Take Money Out If You Are the Beneficiary of a 401k Plan

If you are the beneficiary of a 401k plan or inherited the plan, the rules that apply to taking money out of the 401k plan are a little different. Your choices will depend on whether you were the spouse of the 401k plan participant or a non-spouse, and whether the 401k plan participant was age 70 ½ or not.

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