Best Ways to Use Your 401(k) Without a Penalty
For those who invest in their 401(k) plan, the traditional thinking is to wait until retirement before taking distributions or withdrawals from the account.
If you take funds out too early, or before the age of 59-1/2, the Internal Revenue Service (IRS) could charge you with a 10% early withdrawal penalty plus income taxes.
However, life events can happen, which might put you in a position where you need to tap into your retirement funds earlier than expected. The good news is that there are a few ways to withdraw from your 401(k) early without incurring a penalty from the IRS.
- If you qualify for a hardship withdrawal, certain immediate expenses won't incur a tax penalty, including education, healthcare, and primary residence expenses.
- You may also be eligible to take a loan from your 401(k), which incurs neither penalty nor taxes, but the loan must be repaid.
- There are also special circumstances where you can withdraw funds penalty-free from a recent employer if you have reached the age of 55.
The simplest and best way to tap your 401(k) without incurring a tax penalty is to use it for the purpose it was intended for—providing retirement income. However, read this article if you need money for a major expense.