Can I Take Out My 401(k) When I'm Not Working?

By Fool.com

If you've lost a job and are without an income, you may be tempted to take some money out of your 401(k) plan to pay your expenses until you're able to find work again. Doing so, however, may come with significant financial consequences.

Beginning at age 59.5, you may withdraw money from your 401(k) plan freely without having to worry about incurring penalties, but if you withdraw funds before reaching 59.5, you could face stiff penalties for accessing that money early. If you leave a job or are terminated, your 401(k) plan will generally include the option to roll your funds into an IRA without penalty. Otherwise, if you withdraw money early from your 401(k), you'll be subject to a 10% penalty plus income taxes on the distribution amount you take. For example, if you take an early distribution in the amount of $20,000 from your 401(k) plan while you're not working, you'll pay a $2,000 penalty in addition to income taxes on that $20,000.

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There is, however, an exception for employees who leave their companies in the year they turn 55 or later. If you're 55 and leave or are terminated by the company sponsoring your 401(k) plan, you're allowed to take penalty-free withdrawals, but you'll still pay income taxes on the amount you take out.

Hardship distributionsSome 401(k) plans have provisions for hardship distributions that allow for the early withdrawal of funds under specific circumstances. You may be eligible for a hardship distribution or withdrawal if you're using the money to:

  • Prevent foreclosure of your primary residence.
  • Purchase a new primary residence.
  • Pay for damage repairs for your primary residence.
  • Pay for post-secondary education for yourself, a spouse, or your dependents.
  • Cover funeral expenses.
  • Pay for medical expenses for yourself, a spouse, or your dependents.

Keep in mind that if you do take a hardship distribution, you may still be subject to a 10% penalty. Furthermore, you may face certain restrictions following your hardship distribution. Some 401(k) plans prohibit employees from contributing additional money for a period of six months after a hardship distribution.

Retirement consequencesTaking money out of your 401(k) plan could affect the extent to which you're able to retire comfortably. By withdrawing funds early, you limit the amount of money left to grow in your account for retirement purposes. For this reason, it may be best to look into other options for accessing immediate cash should you find yourself out of work.

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