Some of the Best Ways to Use Your 401(k) Account without Any Penalty

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For people who are planning to invest money in their 401(k) account, the traditional method is to wait for your retirement age until you make any withdrawals. If you withdraw funds earlier, the IRS will charge you a 10% penalty for the money you withdraw. Apart from that, you also need to pay the mandatory taxes. 

However, due to the uncertainties of life, you might face a situation where you’ll have no other option but to withdraw the retirement funds early. Fortunately, there are some great ways you can withdraw funds from your 401(k) account without facing any penalty. Continue reading this article to know more.

Taking Normal 401(k) Distributions 

Do you know the rules of a 401(k) account? The IRS rules imply that you can withdraw money from your 401(k) account without a 10% penalty when you reach your retirement age or become permanently disabled. Depending on the terms and conditions of the plan of your employers, you might choose to take special distributions, such as annual or monthly payments. You can also receive a lump-sum amount up-front. 

If you have chosen a traditional 401(k) plan, you need to pay the income tax on the money you want to withdraw from your account. However, if you have chosen a Roth 401(k) account, then you’ve already paid the taxes when investing the money in your 401(k) account. This means that you don’t need to pay any taxes on your withdrawals. Once you age 72, it’s mandatory to take RMDs from your 401(k) account using the formula from the IRS. 

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Make a Hardship Withdrawal 

Depending on the employer’s 401(k) plan, you might be able to make early withdrawals from your 401(k) account without paying the penalty, as long as you meet some specific criteria. This type of withdrawal, where you don’t need to worry about the penalty, is known as a hardship withdrawal. This will only apply when you’re suffering from a massive financial burden, and you don’t have any other option to settle debts. As per IRS, hardship withdrawals can be made for immediate financial needs. 

The IRS will consider the practical necessity of the expenses as well as your other assets, such as your investment account balance and savings account. 

However, under what circumstances will you be allowed to make a hardship withdrawal? Here are some conditions when you’re eligible to make withdrawals without penalty:

  • Emergency medical expenses 
  • Funeral expenses 
  • Educational expenses 
  • Home-buying expenses 

Taking a Loan from Your 401(k) Account 

If you fail to meet the specific criteria of the hardship withdrawal, you might still be able to withdraw from your 401(k) account, only if the employer allows it. Some specific terms of 401(k) loans depend on the plans you choose. There are some specific basic guidelines provided by the IRS for loans so that you don’t end up triggering the 10% penalty upon withdrawal. Make sure you contact solo 401k for additional info. 

For instance, if you have a traditional or Roth 401(k) account, you cannot take a loan of more than 50% of your overall account balance. Even though it’s possible to take multiple loans, the 50% criteria will be dependent on your overall outstanding loan balances. 

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Conclusion

These are great ways to use your 401(k) account without penalty. Do you have any other questions in mind? Make sure you let us know in the comment section. 

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