Withdrawing From 401K

Withdrawing from 401k accounts can be done, but only under a number of very specific circumstances. If these circumstances are not met you will be charged a very large penalty for cashing out even a portion of the funds. These accounts have strict rules set up to protect your investments that, unfortunately, can make it very hard for you to get to the funds yourself.

The easiest and intended way to payout a 401k is after you turn 59 years and 6 months old. This is considered retirement age, and you can cash out your account without penalty. It is important to note that you do have to start taking from the account by the time you turn 70 years old.

If you are not yet old enough to do this, you do have some other options under some plans for withdrawing from 401k, so you'll want to check with the company your account is with.

One option that will work for any circumstances you need the money for are 401k loans. You can borrow up to $50,000, or 50% of the account balance, whichever is less. You do have to repay the money within five years, if you don't then the money will be considered cashed out as though you had cashed out in the first place and you will have to pay the penalties. The interest on these loans are low, and the money you pay in interest goes right into your account.

When you are in a situation of economic hardship, where you will lose your home or you have medical bills you can take money out without fees, but this money has to be repaid.

Some plans will allow you to pay for classes that further your current career by withdrawing from 401k funds.

If you take money out of your account that doesn't follow the guidelines for any of these allowed circumstances, you will be charged a large penalty. Cashing out, and paying this penalty, can only be done when you have left your current employer. At this time you have 30 days to decide to leave the money with your current employers 401k, roll into a new employers account, roll into an IRA, or cash out.

When you cash out early (before retirement age) you have to pay federal taxes, state taxes, and a ten percent early withdrawal fee. The federal tax percent varies based on your tax bracket, and state taxes vary state to state, so the exact percentage is different for every case. Generally speaking, however, the penalty can easily amount to thirty to forty percent of the amount you take out.

Because of these heavy penalties withdrawing from 401k accounts is only done when customers need money now and feel they have no other choice.