How To Cash In Your 401k (Without Penalty)

by Junior Boomer on September 30, 2010

Your employee-sponsored 401k retirement account is meant to remain untouched until you have reached the age of retirement. However, there are circumstances that arise where a lump sum of cash is needed for an emergency and 401k funds are the only resource available. Funds withdrawn from a 401k account early are subjected to a ten percent penalty fee in addition to the taxes assessed on the amount by the IRS but there are ways to access your 401k fund without incurring a penalty.

Ways to cash in 401k with no penalty

Creative Commons License photo credit: House Committee on Education and Labor

401k Loan

In hardship situations, the federal government gives administrators of retirement plans the ability to offer 401k loans. Not all providers will offer such loans but if you are in need of cash, you can inquire with your provider. Loans can be used for a number of reasons and the government does not have guidelines for how the money is used, though some employers will restrict what the funds can be used for and how much can be taken out.

Generally, a loan in the amount of up to 50% of their vested balance with a maximum loan amount of $50,000. The loan must then be paid back with interest within a 5 year time period. If the borrowed cash is towards the purchase of a home, the payback time granted is much longer.

401k Hardship Withdrawal

If you are not eligible for a 401k loan, you may still be able to access your retirement funds when you have a genuine need. Not all employers will offer such hardship withdrawals so you’ll need to check in with your plan’s provider to find out the terms for hardship conditions.

Hardship withdrawals can be used for one of the following five circumstances:

  • Purchase of a primary home
  • Tuition, room and board, and fees associated with higher education for the next twelve months for the purpose of you, your spouse, dependents, and non-dependent children.
  • Prevention of primary residence foreclosure or eviction.
  • As payment for tax-deductible, non-reimbursable medical expenses for you, your spouse, or your dependents.
  • Several financial hardship you can prove.

Typically, there are four conditions that must be met in order to qualify for a penalty-free hardship withdrawal including:

  1. The withdrawal is necessary because of a serious, immediate financial need.
  2. The withdrawal is necessary because you do not have access to money from any other resource.
  3. The withdrawal amount does not exceed the total amount of money you need.
  4. Borrower has already received all distributable or non-taxable loans associated with your 401k retirement plan.

Steps to Cash in 401k Penalty Free

If you are in serious need of withdrawing funds from your 401k retirement account because you have exhausted all other resources, consult with the administrator of your plan to understand your options as all plans differ in terms and conditions by provider.

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{ 1 comment… read it below or add one }

Linda Howell October 4, 2012 at 3:54 pm

I was recently diagnosed with cancer as well as pending other life threatning illnesss.

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