You work, you save, you retire – it’s the American way, right?
But what happens when you have done a good job saving and get to be one of the lucky ones to retire early – are you still subject to the IRS rules of being age 59 1/2 before you can touch your money?
(Side rant: what the heck is up with the IRS and these 1/2 ages anyway? This concludes my rant.)
If you are stressed about having to pay the 10% early withdraw penalty, don’t freak out just yet. The IRS – believe it or not – does allow methods to withdraw funds from your 401k without penalty. Just make sure you follow the rules before you claim your prize.
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 Reaper
Okay, 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 Disability
If 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 Bills
A 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.
Hello,
I’m 63 years old and still employed. I’d like to take money from my 401(k) to pay off my mortgage and put a down payment on a new home. What sort of penalties or tax issues could I potentially face in doing this?
Hi Luanne – If you’re still employed by the same company where you have the 401k they may not allow you to withdraw the money until you leave the company. But on the tax side, since you’re over 59.5 there won’t be a 10% early withdrawal penalty on the amount taken. You will have to pay tax on the withdrawal however, so you may want to take the money over several years to minimize the tax liability. This is even more important since you’re still working and earning money.
Jeff,
I am 52 and working for a Utility company in Texas, with a previous employer 401K rolled into an IRA. a bit over 400k
I wanted to withdraw from my 401K to pay off my mortgage, balance 97k. I have no children or dependants. I fear that if something happens to me health wise the government will just take what I have in the 401k and I won’t be able to use it, so why not use it for me and make my life easier now
@Patrick Personally, I think you’re overreacting to the government taking away your 401k. If you pull the money out to pay off your mortgage you’ll then be giving the government a huge tax gift in the taxes you’ll paying from withdrawing your 401k. Either way, you have full control and can decide to pay it off if that’s the peace of mind you need.
We are purchasing our first home. We are trying to withdraw (hardship withdraw) from a 401k (my spouse is still employed with the company). He has elected to quit participating in the 401k. We want to withdraw monies to help with down payment. He has been trying for months! With many delays.He has provided all the documentation asked for and they have delayed saying they couldn’t open said documents etc. and never informing him they couldn’t. Which of course drug out time, and gave them time to drag out past when the payments were due, therefore not wanting to give the full amount of the hardship request. Finally after confirming they have all the documentation, they now say since the deadline for the deposits to the construction company has passed they want to confirm if we made any of the deposits and if so, we cannot receive the full amount asked for. They have asked to contact the builder personally to confirm if we had made any. It is a large well known retirement management company.
Hi Kaci – According to the IRS withdrawing money from a 401k to purchase a house isn’t a permitted hardship, at least not to get the 10% penalty waived. Are you sure that isn’t the underlying problem?
It actually is allowed for the costs related to purchasing a principle residence.
“Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee’s principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.
(Reg. §1.401(k)-1(d)(3)(iii))”
We do realize we will have to pay the 10% penalty but, shouldn’t he get the amount he requested in the first place?
Yes Kaci, as long as the employer/plan sponsor agree. The IRS has rules on hardship withdrawals, but they leave it to the employer as to whether or not they will allow them, and specifically how. You have to work with your employer on this, there’s no way around it.
I no longer work because my employer couldn’t hold my job any longer so I had got 13000 what left of my 401k so on my 1099 say I had 21000 in there but 4000 was took out for taxes and 1000 for state will I get a refund check
That sounds confusing Valerie. You won’t know about a refund until you do your taxes. The distribution will be added to your other income, and then the refund will be determined.
Hey, Jeff.
Nice to see someone who does indeed answer the questions asked…
My husband has worked for UTC for 38 years and has just retired at the tender age of 62.
We were planning on selling out home and moving South.
He inquired about closing out his 401K with the company and was told “no problem, but you must pay 20%”…
I can’t tell you what he contributed to all those years, thinking one day, we would be living a good life with the monies saved…
Now we find we are losing a great deal…
I really believe these 401K’s are a crock and would be much smarter and richer going in a different form of savings.
There were many at UTC that had no clue, what they were getting into ,,
Hi Sara – Are you just planning to take the money out to buy a house? If so, they have to withhold 20% for estimated income tax. If you plan to roll it over into an IRA, you need to share that with them and see if that will change the answer. Please discuss this in detail with the plan administrator and your CPA. The tax implications can be huge, either way. There are some quirky government plans that do have such a requirement.
Hi Jeff…
I am 55 years old and will be taking early retirement in 9 months. I have 48,300.00 in my current 401k thru my employer and plan on just leaving it alone for several years after retirement because my 2 pensions will support us until social security kicks in. Here’s my question: in 2008 I bought 750 shares of Ford stock…most of that at 2.80 per share…it’s now over 12.00 share, was as high as 14.00. With reinvestment of dividends my 750 shares is now 902 shares….the Ford stock alone makes up about 23% of my portfolio with rest being various mutual funds. I set my 401k up so I could buy stocks/mutual funds outside my company offerings. Should I sell off some of the Ford stock since it alone makes up a quarter of my balance or sit tight? If I should sell some what percentage should I keep?
Thanks for any suggestions you can make!
Hi Darren – There are no hard and fast rules here, but most financial advisors will tell you not to have any more than 5% to 10% of your portfolio in the stock of any one company. I’d lean more toward 5% since Ford is an auto stock, and the auto industry is notoriously cyclical.
Hello. I’m 37 and no longer work for the organization that gave me 401k. Since I’m going back to school, can I roll over to IRA and then withdraw tuition costs that way (so that I avoid 10% penalty).
You’ll have to put the money into a rollover IRA account, and that will incur the penalty. The IRS is aware of workarounds, and creates limits to prevent it.
I took out a loan on my 401k in the amount of 20k. It is being paid back thru deductions for the next 2 years. I was advised at the time that this will not count against me when i do my taxes. I haven’t received my 1099 yet and i want to do my taxes. Question: Will i have to pay any taxes on this since i’m already paying it back? Do i need my 1099 to file with my taxes? Please explain the process. Thank you.
Hi Joseph – The loan should not appear on the 1099. It’s a loan and therefore not a taxable event.
I’m just over 60 years old. When I eventually leave my job, is there any way to get a lump sum from my 401k without paying income tax on the total amount?
Hi Bill – Since you’re over 59.5 there won’t be a 10% early withdrawal penalty. But you still have to pay ordinary income tax on the amount of the distribution. If you made non-deductible contributions to the plan, a pro-rata part of the distribution wouldn’t be taxable, but any tax deferred contributions and all the earnings in the plan will be subject to tax.
Do you still have to pay income tax after 59 1/2 age ?
Yes Akash. As long as the contributions were tax deferred, regular income tax must be paid on distributions. However using the techniques in the article will enable you to avoid the 10% early withdrawal penalty, which won’t apply if you’re over 59.5 anyway.
I am 45 years old married with 4 children. I am looking to take some money out of my 401K. I am starting a new career and need money for education costs for my children and for living exspenses. Am I subject to the 10% fee?
Hi Michael – There’s no way to do that for education with a 401k. You might be able to set up a “series of substantially equal periodic payments” from the plan, which will allow for the distribution of funds over your life expectancy – which could be another 40 years. You’d have to pay income tax, but not the 10% early withdrawal penalty. See if you can set that up with your former employer.
Hi, I was paying 401k for 2 years and got fired after that. How can I withdrawal that money since I no longer work their?
Hi Erika – You should be able to request a withdrawal of the money. But you will probably have to pay income taxes on the amount withdrawn, as well as a 10% early withdrawal penalty if you are under age 59.5. A better option is to have it directly rolled over into either a new employer 401k plan (if they’ll allow it) or into your own IRA. No taxes or penalties with either of those moves.
Can I access my 401k to put a down payment on a home?. I am going to be a first-time home buyer will I be penalized for doing that im planning on using 4k
Hi Naomi – You can with an IRA, but not with a 401(k), at least not for the purchase of a home, first or otherwise. You can always take the money out of your 401k – if your employer will allow you but they probably won’t. You’ll have to pay a 10% penalty if they do. But if they don’t, you might try asking for a loan against the plan.
I have no job in USA now and my current location is INDIA. How can I withdraw all my funds without pay any tax / penalty ?
Hi Shashank – I think the same rules will apply as if you were a US resident. If you’d like to get more information, I’d suggest that you consult with a CPA or a tax attorney, either based in the US.
Good afternoon I work at Sikorsky aircraft and turned 55 this year. My company that owned Sikorsky ,UTC was sold to Lockheed Martin starting in 2016. Would I have to pay the 10 percent penalty with an early 401k withdrawal.And I still work there. Thanks
Hi Frank – You should be able to get your 401k distributed to you under 72t, as a series of equal payments, since you’re 55. But you can also take the 401k and roll it over into an IRA, and pay no tax at all. If you need the money to live on, see if your company will do the 72t.
Thank you for your answer. But what if I need to take a large sum of money out of my 401k in this situation that im in. Would I still have to pay a 10 percent penalty.?
Yes, Frank, as long as the amount withdrawn exceeds the amount of the scheduled distribution. Turning 55 doesn’t enable you to tap your 401k without limit and without penalty. You have to work within the established regulations.
I am 64 and a renter. Is it a mistake to withdraw enough from my 401k to avoid PMI.
Hi Debra – Your going to have to crunch the numbers. You will have to pay regular income tax on the amount of the withdrawal, so you’ll have to measure out that cost versus what you will save in PMI – which is a monthly expense. Can you take a loan on the plan instead of a withdrawal?
Hi Jeff my name is Manuel i’m 55 yrs been employed for company 15 yrs . but was bought out by another company that will be taking over in the year 2017 . Did have neck and spine surgery a year ago , that being said not knowing in the condition status of my employment of possibly forced into early retirement because of being a high risk could I be able to withdraw from my 401 K with out the penalty .
Hi Manuel – You should be able to do a distribution under 72t that allows substantially equal payments. You’ll still have to pay regular income tax on the withdrawals, but not the 10% penalty.
My husband retired at age 55 and took advantage of the IRS age 55 separation rule and is taking distributions from his 401K without a penalty. Would my husband be able to continue the distributions if he takes a temporary job or starts a business?
No Corrine, he can take earn money and still continue with the 72t.
Jeff
I am 38 and i took money out of my 401k for a hardship. Do i have to claim it on my tax return
Hi Jenn – Yes you will. Even though the penalty is waived for a hardship, the withdrawal is still subject to ordinary income tax. The general rule is that if you get a tax break going in, you’ll have a tax liability going out.
Jeff,
I am 55 years old. I am a teacher and I have a TIAA CREFT account. Also I have a couple account (Roth and IRA) with Vanguard. My Vaguard’s accounts are from a previous employer about 15 years ago. I am planning to retire in 4 or 5 years.
Can withdraw funds from your 401k with Vanguard without penalty if use the “stay Equal and Periodic With 72t”, even if I still working?
Hi JC – You can use the series of substantially equal payments under 72t, but not the separation from service provision (applies to 401k only).
I’m 56 the dr office I worked for has merged with another office and right now my 401 is frozen. They said we could withdraw money, will that qualify as a separate from service. My husband is disabled and that money can help out. Thank karen
Hi Karen – You won’t qualify for the penalty exemption for your husband’s disability (it has to be your disability as owner of the plan). But you may qualify under separation from service with substantially equal payments. I think that’s what they’re talking about. Talk with your accountant, or consult with one if you don’t use one. There’ something of a gray zone here because it seems as if you’re still employed with the original employer.
Thanks for the article. I recently separated from my employer of two years and have about 10k that I am withdrawing from a 401k. If I elect to have 100% withheld and sent to the IRS are the funds still subject to all of the taxes and the 10% penalty?
I will be doing it either way to offset the tax liability from freelance (1099) income I have been making but was curious if the fact that the funds never touch my hands matters…
Thank you for your time.
Hi Tony – You won’t know what the tax liability for the distribution will be until you file your income tax in the spring. The withholding is just an estimate to cover the expected liability. You could get a refund as a result of the withholding. After all, if you’ve been unemployed much of the year, your income and your tax bracket will be lower than usual.
Good day. So if Tony decides to withhold 100% of 401k funds and transfer to IRS, and assuming Tony is Less Than 59 1/2 years old, will those 100% funds that were sent directly to IRS still be liable for the 10% penalty?
Yes Antonio, unless you meet one of the exceptions. But if 100% of the 401k is paid as taxes, you’d probably still get a refund. But then I don’t know your complete tax situation.
I retired from the state of ga and receive a monthly retirement check. I went back to work and am in a 491k plan. I am 58 years old and planning to stop working to take care of my mother. Will I be penalized if I take my money out now?
Hi Leslie – I’m not aware of all of the many state plans that are available so I can’t advise you. Please check with your employer to see what the regulations are. There may be a hardship provision that allows you to withdraw the money penalty-free.
You say “If 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.” I am currently on disability approved by my disability insurance, but everywhere else, I read that must be permanently and totally disabled. Will a letter from my disability insurance company work for me?
I’m not sure the IRS specifies permanent or temporary disability. You need to contact your employer with this question, since it’s up to them whether or not they allow hardship withdrawals, under what terms and what the documentation requirements are.
I am 36 years old and i just received a letter stating i accrued a total “pension plan” balance of around $4,000 at a job i held for a little while but am no longer employed for. i would like to access that money to pay some bills and purchase a cheap car to get me back and forth from my new job. Is this possible?
Hi Chad – You should be able to, but you will have to pay regular income tax on the amount of the distribution. You will also have to pay a 10% early withdrawal penalty if you are under 59.5.
I work for a company full time right now, but am thinking about going to part time hours. Part time employees where I work do not qualify for 401k. So, my question is.. If I no longer qualify for this benefit, will I be able to withdraw the money? And, how much in medical expenses do you have to owe in that year to qualify for early withdraw without penalty?
Hi Sonja – If and how much you will be able to withdraw from the 401k while still employed will be up to your employer. What ever you do withdraw will be subject to regular income tax, as well as the 10% early withdrawal penalty if you are under age 59.5. As to the medical withdrawal, you can get a hardship exemption on the withdrawal of an amount to cover medical expenses to the degree that the expenses exceed 10% of your adjusted gross income.
My husband separated from his employment a couple of months ago. He was fully vested after 13 years of employment. He filled out paperwork to take a distribution to pay some substantial medical bills. After receiving the paperwork the company is now telling him there is a one year restriction on touching the money, whether it be for a distribution or rolling the money into a new account. Is this legal?? I always thought once you were no longer employed with a company the 401k money was yours.
Hi Ashley – Unfortunately, the IRS give a lot of latitude to employers on how the handle the specifics of 401k plans. For example, though the IRS permits 401k loans and contribution matches, the employer is not required to provide either. I don’t know for certain, but I believe that have significant flexibility in determining distributions too. You might want to consult with an attorney who specializes in pension law. That will tell you right away if you have any recourse. And sometimes just having a letter sent to the employer from an attorney magically fixes the problem. It’s worth a shot.
Jeff,
I have a traditional pension as well as a 401k. I plan to retire next year (age 55). my pension will be a lump sum amount. Can I roll that lump sum into my 401k and then withdraw without the 10% penalty? or do i have to leave them as separate accounts and withdraw from 401k first?
Thanks
Bobbie
Hi Bobbie – I believe there’s a complication in the exemption rules when you do a rollover, particularly one that close to retirement. Can your pension trustee set up a series of periodic payments? I’d lean toward keeping them separate and withdrawing from the 401k first. You can put the pension funds into an IRA. But please contact a CPA to get specific advice as to what to do. Alternatively, you might be able to get the same advice from your 401k trustee free of charge. Contact them about the pension rollover and see what they recommend. Be very specific in explaining to them that you want to withdraw the pension funds penalty free, after they are deposited into your 401k, and make sure that’s acceptable.
Be real careful on this, as penalties on pension and retirement mistakes can be steep.
Hi live in Calif my employer has a 403 b I have 2 current loans on my 403 if I want can I withdraw the remaining monies thank you
Hi Nancy – I’m not sure what your question is, but if you don’t repay the loans, your employer will declare them as early distributions. You will then have to pay tax on the amount of the loans, plus a 10% early withdrawal penalty. Was that your question???
My wife had a mastectomy in 2014. In 2015 she decided on breast reconstruction. We were under the impression from the surgeon that it was covered by our insurance. He was actually not in network, so we received a bill for 96,000.00 dollars. We need to try and lower this somehow but probably will still need a large amount to settle the debt. We have her 401k from an old employer, she is 51 and we would like to avoid the 10% penalty. we are in 15% tax bracket. She makes approx. 53,000 per year, I am retired. Any suggestions would be a great help.
Thank you
Michael F.
Hi Michael – There is an exemption to the penalty if the total cost of medical expenses for the year exceed 10% of your income, even if you don’t itemize. But I’m pretty sure the withdrawal has to occur in the year in which the liability was incurred. But check with your tax preparer!
Hello, my husband and I have had no income for the last 4 months. My husband decided to withdraw his 401k, so that we have money to live on. I can’t find anywhere that not having any income is a hardship that would be an exception to the tax penalty. Please advice. Thanks
Hi Mackenzie – The IRS does allow for exemption from the penalty under limited circumstances. There’s a list here and I’d suggest that you scan it to see if any apply. If he was separated from his job and was at least 55 years old (or 50 if he held a government job), he may qualify.
Hi Jeff I am currently 54 and would like to buy a retirement house with my 401k money how do I do this to avoid the 35% tax I have already done a homeowners loan back in 2011 thanks
Hi Sherri – You really can’t. There is no homebuyer’s exclusion on a 401k (that’s for IRAs only). So if you withdraw money for the purchase – assuming your employer allows it – you will have to pay both regular income tax and the 10% early withdrawal penalty.
Will your employer allow you to take a loan against the plan that you can use for the down payment? If you can borrow against it, that would be your workaround the taxes and penalty. However, the loan amount will be limited to $50,000, and would have to have a repayment plan.
Talk to your employer and see if this is an option, and what the limitations are.
hi, i am 53 years old and have been out of work for the last 3 1/2 years due to disability, im still disable, and no income, can i use my 401k to help me on a monthly basis and hope one day i will be able to go back and work again.please any information will be appreciated.
thanks
Hi John – You should be able to take a 72t distribution for disability purposes. But please understand that while this will exempt you from the 10% early withdrawal penalty tax, you will still have to pay ordinary income tax on the amounts distributed. Hope this helps!
what about if i start to use the 72 distribution an after , two years I don’t need anymore , can I stop or do I need to use the 72 (months?) what is the ordinary income taxes?
I took out a 401k loan recently and they mailed the check. I received the check but have not cashed it as I emailed the principal and told them it was not needed. My question is if I do not cash the check for the loan will I be charged for the loan anyway as I have not technically accepted it? My payment is scheduled to come from my paycheck, will my employer begin charging me if the loan Check is not cashed and the loan therefore not received?
Hi Jimmy – You’re going to have to discuss that with the plan administrator and see how that will be handled. My guess is that no interest or fees will ultimately be charged, but the payroll deduction may happen if a deadline has been crossed, and you’ll have to be prepared for that. It’s all going to come down to what the plan policy is in this kind of situation, and they may have to make one up if there is no policy (good possibility!). The good news is that it won’t affect your income tax liability at all, so be thankful for that. That said, please move to resolve this as soon as possible to minimize any possible cost to you.
Good morning Mr. Rose. My husband will be 55 in June this year and he has been at the same job for more than 30 years. The company was bought out and there have been many of the more seasoned employs either fired or ‘asked’ to retire. My husband could very likely be one of them. He has a 401K with his job and we want him to be able to access some of it and roll the rest into my retirement plan. Would this be a qualifier to obtain a portion without penalty?
Hi Aimee – First, you cannot roll over the distribution from your husband’s 401k plan to your retirement plan. Retirement plans are tied to the individual, so any movements must be to and from accounts owned by the same person. As to accessing some of the money, you will have to pay ordinary income tax on the amounts withdrawn (and not rolled over), but you can escape the 10% early withdrawal penalty under the “separation from service” by employees age 55 and older, as indicated on this chart. I hope this helps!
Hi my husband recently was told he could roll over his 401k or withdraw it. He wants to get it out but he wanted to do this without a lot of penalties. What can he do? The company he works for went from P&G to Duracell and its $100,000 what can he do to avoid so many penalties?
Hi Kim – There are exemptions, and you can check them out on the IRS website to see if any apply. Otherwise the best strategy is to roll the money over into another plan or an IRA to avoid both regular tax and the penalty.
Do I have to pay the 10% early withdrawal penalty on my 401K when the company I worked for shut down?
Hi Whitney – The 401k should be intact with the plan trustee, so if you take the funds directly and you don’t meet any of the exemptions then, yes the 10% penalty will apply.
If the plan was distributed because the trustee is going down with the company, then you’ll need to speak with a CPA or tax attorney as to how to proceed. It’s more complicated if that’s the case.
I quit my job with the company I was working for in July of last year. At the end of September, I terminated my 401K and took a lump sum distribution, minus 20% for federal taxes. If I add the sum to this years fillings, It puts me in a higher tax bracket and I will be required to pay in for this year. Can I wait till next year to file my 1099-R as income?
My husband was falsely accused of excessive force on an inmate and was suspended from his state corrections job and ultimately fired. He was off over a year in total. They forced him to retire (he is 44) after they fired him and we were told not to spend the money because we had to pay it back when he got his job back. We did not have enough money to pay our bills and didn’t want to lose our house so we took out his deferred comp. He got his job back after a year and we had to pay the retirement money back in. We got the 1099R’s for the retirement money and the deferred comp. I know we have to pay tax on the money, but is there a way to not pay the penalties. It was not his fault this situation happened. The prison acts like nothing happened and made him “whole”, but we are left with the fault out of the situation.
Hi Tara – This is more of a legal issue than a tax issue. I think you need to consult with an attorney, probably one who specializes in employment/wrongful discharge cases. There’s a lot going on here, as I’m sure you already realize.
My company closed down and distributed my 401k minus taxes and penalties. Who is responsible if they didn’t take enough taxes out even though it was over 30% taken out? I went to try to file and they said it wasn’t enough taken out and that I can’t file through the original state that I lived in because it’s been over 6 mons. BTW I’m 53.
Hi Jessica – Since you were the one who received the money in the distribution, you must pay the tax liability. The amount the employer withheld is just an estimate, which is more typically 10% or 20% – so they actually withheld more for you. Since the company closed down, you might be able to get an exception to the 10% early withdrawal penalty which will lower your federal tax liability. Check out the exceptions under a 72(t) distribution.
I’m not sure about the state filing requirement that you indicated. It sounds unlikely, particularly if it means you’ll owe state tax, but some of the states have some provisions that are nothing short of weird! Please consult a tax advisor in the state in question to make sure about that, it just doesn’t sound right.
I am no longer employed by the job where I accrued a large amount of money. When I checked they said I cannot take any type of loan due to the fact I no longer work there. Is that true?
Hi Terry – Your former employer is correct. 401(k) loans are for active employees only, and even at that an employer is not required to make them available. Any money you receive from the plan after separation will be considered to be a distribution.
My employers rules state an employee cannot take early withdrawals from our 401k before age 57 1/2…IRS rules say 55. Which rule takes precedents?
Hi Darren – Your question is actually floating in a gray zone! Here’s the way I understand it. The IRS issues minimum guidelines, which an employer cannot exceed. However, they also allow the employer significant latitude in making the their plans more restrictive. A good example of this is 401(k) loans. The IRS permits them (within certain limits) but the employer is not required to offer them.
There can also be an issue with contributions in your case. IRS rules on early distributions refer primarily to employee contributions. The employer may have other, more restrictive rules in regard to the employer portion of contributions, and even to earnings in the account.
401(k) Resource Guide – Plan Participants – General Distribution Rules may shed some light on this, but I think you’re going to have to get into some deep discussions with your employer on this subject. It’s not likely that you’ll see the IRS overrule your employer if their policies are more restrictive.
Sorry for the error above in my post..I need to withdraw $ 15,000.00, not $11,000.00.
Thank you.
Hi Kellie – You can take a distribution from the 401(k) for qualified higher education expenses (see https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Tax-on-Early-Distributions). This will exempt you from the 10% early withdrawal penalty, but you will still have to pay regular income tax on the distribution. But since you are unemployed and a full-time student, your taxable income is probably close to zero. If you do have to pay tax, it will be minimal.
That link says that only works for IRAs, but I heard the same information about a 401k. Do you know for sure?