Getting Your Money Out of a Retirement Account

Last updated: April 9, 2016

Know Before Hand What is Allowed and What is Not

Because the aim of 401(k) plans is to encourage saving for retirement, the IRS puts restrictions on taking the money out too soon.

  • You generally can’t have it back until you leave the company—or reach age 591⁄2, if your plan allows in service distribution. This is a special clause that will allow you to access some or all of your assets. Often these are eligible to be rolled into another IRA also.

When you leave the job, how the money is treated depends on your age and what you do with it. You have four choices:

  1. Leave it with your former employer

  2. Transfer it to your new employer’s plan, if allowed

  3. Roll it over to an IRA

  4. Or cash it out

  • The first three choices have no immediate tax consequences.

  • The last one does and it can be costly, both immediately and in the long run.

    • You’ll owe taxes on your distribution, plus a 10% penalty if you are younger than 55 in the year you leave your job.

    • It could also take a big bite out of your future retirement nest egg.

Some Exceptions

You may be able to tap your employer-based retirement account early by taking a loan.

  • If your plan permits it, you can borrow as much as half of your balance, up to a maximum of $50,000.

  • Solo 401(k) plans also allow loans; SEPs and IRAs do not.

  • You must repay the loan within five years unless you use the money to buy a home.

When you borrow from your 401(k) account, the plan will deduct the amount of the loan from your account balance and set up a repayment schedule at a specified rate of interest. As you repay, the money is added back to your balance.

Because you are, in effect, borrowing from yourself and paying yourself interest, some plan participants think of 401(k) loans as “free money.” However, these loans aren’t free.

  • The real cost consists of loan setup fees you pay, plus the lost earnings on the funds while they are out of your account.

  • Depending on your personal situation, however, taking a loan from a retirement account could be cheaper than other sources of borrowing (and there’s no credit check to qualify).

*The information on this page is credited to IPT and Kiplinger. Their original materials are made available by the Kansas Securities here.

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