Ways to claim your 401k early and penalty-free
A few notes beforehand…
- You always have the option to take a 401k loan (if your plan allows it). Does that mean you should take it? I’m hoping that you have ample emergency funds that you can tap first. Stated another way and more blunt: You Better have enough emergency funds. Got it? If not, make sure you know the 401k hardship withdrawal rules.
- Before you make any withdraws at of your 401k, do more than just read this post. Consult your financial advisor and/or tax professional to make sure you have your bases covered.
1. A Visit From The Grim ReaperOkay, I’m sure that death is probably not the option that you wanted to hear. I guess technically you don’t benefit. Rest assured your family will benefit in that they can use your retirement funds to cover burial expenses and supplement other income needs now that you’re not around. Just make sure to update your beneficiaries << you have been warned.
2. Qualifying DisabilityIf you have been deemed to be disabled either buy an insurance company or Social Security, then you are entitled to withdraw from your 401k penalty free. You’ll have to provide a disability letter to your 401k custodian to verify your status and avoid the penalty.
3. Medical BillsA visit to the emergency room can add up really quick nowadays. Our middle son banged his head on our bathroom doorway and we found that out really quick. CHA-CHING! If you don’t pay them, next thing you know you have debt collectors hounding you. To avoid the penalty a few things have to occur:
- Withdraw Same Year. You have to take the money out in the same year you incurred the medical bills.
- 7.5% Rule. Take 7.5% of your AGI (Adjusted Gross Income) and that’s the to the extent that the unreimbursed medical bills that you’ll be allowed to claim penalty free from your 401k.