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What are terms and conditions of withdrawing from a 401K savings plan?

Aug 28, 2014 by Ofelia from Kailua-Kona, HI in  |  Flag
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1 vote

Hi Ofelia,

In addition to what Layton mentioned above, some people opt to borrow from their 401k balances rather than take withdrawals. Most advisors will recommend this as a very last resort though, for several reasons:

1) You don't pay taxes on your 401k contributions or the gains from investment until you withdraw the funds. When you borrow from a 401k balance, you must repay the principal amount and interest using after tax dollars. This essentially means you're paying tax twice - once to repay your loan, and again once you take withdrawals from the plan.

2) If your employment ends while you still have an outstanding 401k loan balance, most plans require you to repay it within 60 days. If this doesn't happen, your loan is considered in default. This requires you to pay taxes on the entire balance plus a 10% early withdrawal penalty if you're under 59 1/2.

3) Loan repayment terms are non-negotiable, and there may be additional fees involved.

There are other reasons loans should be used as a last resort, but it remains an option depending on your circumstances.

2 Comments   |  Flag   |  Oct 30, 2014 from Lake Oswego, OR
Mike

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Flag |  Dec 16, 2019
Mike

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Flag |  Dec 16, 2019

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Layton Jacob Cox Level 11

401K withdrawals are taxable as ordinary income and if you don't meet certain rules an additional 10% penalty tax will be added. If you have not reached at least age 59 ½ then you will owe the 10% penalty tax unless:

You die and the account is paid to your beneficiary (not the easiest way of doing it) You become disabled You terminate employment and are at least 55 years old You withdraw an amount less than is allowable as a medical expense deduction Your withdrawal is related to a qualified domestic relations order (QDRO)

However, think twice before pulling money out because in addition to penalties and taxes, you lose all the potential future investment growth of that retirement plan money.

If you would like a little be more personalized advice, please elaborate on your scenario: Why you need the money, Age, ect.

Comment   |  Flag   |  Aug 29, 2014 from Tucson, AZ

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