If you’re thinking about taking an early withdrawal from your 401k, make sure you know these four things before you take your first distribution.
Non-Qualified Early Withdrawals Will Be Subject to a 10% Penalty
Non-qualified withdrawals from your 401k will be assessed a 10% penalty in addition to any income taxes you’ll face. This penalty applies to most withdrawals made before you turn 59.5, although there are some exceptions.
You May Be Able to Withdraw Money from Your 401k as Early as Age 55 without Penalty
In order to be able to begin making penalty-free distributions from your 401k, you must have separated service from your employer after you turned 55. If you left your job prior to turning 55, you must wait until you turn 59.5 to take penalty-free distributions.
401k Loans Are Not Subject to Penalties
One exception to the early withdrawal penalty is the ability to take a loan from your 401k at any age. You can borrow as much as 50% of the vested value from your 401k, up to a maximum of $50,000. The interest rate charged on these loans is typically 1-2% above the prime rate (4% at the time of writing). As long as you pay off the loan within five years (or 60 days if you leave your employer), no penalties will be assessed on the amount of the loan.
401k Assets Rolled into an IRA Generally Can’t Be Withdrawn Prior to Age 59.5
Generally speaking, when you roll your 401k into an IRA, those assets can’t be withdrawn until you reach age 59.5 without incurring a penalty. There are, however, two notable exceptions. First-time home buyers can withdraw up to $10,000, and you can use IRA funds to pay for higher education expenses without penalty.
This information is not intended to be a substitute for specific individualized advice. We suggest that you discuss your specific issues with a qualified advisor.