What if I need the money before I retire?
- How does a 401(k) plan work?
- How much can I contribute to my 401(k)?
- How does the money get invested?
- What's a matching contribution?
- How does vesting work?
- What if my matching contribution is in company stock?
- What if I need the money before I retire?
- What if I leave my job?
- When do I have to take the money out?
Typically you need to keep the money in the plan until you reach age 59 ½. Withdraw any of it before then and you'll be hit with a bruising 10% early withdrawal penalty, on top of the regular income tax that is due on withdrawals. Bad idea.
There are exceptions, however. The IRS waives the 10% penalty for certain "hardship" withdrawals. Each plan's rules vary (check yours to be sure), but you may be able take money out of your retirement account penalty-free before age 59 ½ if you use it for:
- Purchasing your first home
- Expenses after the onset of a sudden disability
- Higher education expenses (like college for your kids)
- Payments you make to prevent eviction or foreclosure.
Don't count on it, though. This money is locked up until retirement for a very good reason: If you spend it now, you risk jeopardizing your financial security when you're older.
If you can't get the money anywhere else, your best option is probably a loan. Many 401(k) plans allow you to borrow against the amount in your account. You must repay the money to your account within a set period - usually a few years - or the loan is treated as a withdrawal, meaning you'll owe taxes and a 10% penalty on it.
There are three main drawbacks to taking out a loan. First, you reduce the money you have growing for your retirement years. Second, you have to pay interest on the amount you borrow - typically the prime rate plus one percentage point - though you do pay the interest to yourself. Third, you must repay any outstanding loan within a few months if you are laid off or decide to change jobs.
