What are your options for withdrawing money from your retirement accounts?
Your options are subject to the conditions set forth in your retirement plan, so depending on how your plan is set up—and your employment status—these are your possible options for accessing your retirement money:
- Request a withdrawal (see below for exceptions to the 10% early withdrawal penalty)
- Request a loan from your qualified retirement plan—401(k), 403(b), or 457(b) (unavailable for IRAs)
- Apply for a hardship, or unforeseen emergency, withdrawal by meeting certain requirements (unavailable for IRAs)
Check your retirement plan’s summary plan description (SPD) or plan highlights document to understand the rules specific to you. Your plan’s conditions for withdrawing money and/or requesting loans may differ from what the IRS allows.
Withdrawals prior to attaining age 59½—what are the exceptions to avoid penalty fees?
You’re always going to pay income taxes when you withdraw pretax retirement savings, whether you’re 25 or 80 years old. But if you make a withdrawal from your retirement account before age 59½, you’re also subject to a 10% early withdrawal penalty, unless you meet one of the exceptions provided by the IRS.
Some exceptions to the 10% penalty before age 59½ for qualified plans and IRAs are:
- Total and permanent disability
- Unreimbursed medical expenses that exceed a certain percentage of your adjusted gross income
- A series of substantially equal payments—you commit to taking payments for five years or until you reach age 59½, whichever comes second (payments must begin after separation from service in qualified plans)
IRA owners are eligible for additional exceptions to the penalty.
- Qualified higher education expenses
- Qualified first-time home buyers, up to $10,000
- Health insurance premiums paid while unemployed
For a complete listing of exceptions, check out the IRS website.
401(k) and other plan loans—which make you the borrower and the lender
When you take a loan from your 401(k) plan (or 403(b) or 457(b) plan), you’re both the borrower and the lender of the money. Although that may make it easier than obtaining a bank loan, it may not necessarily make financial sense for you. There are trade-offs to consider when taking a loan from your retirement plan.
|Potential pros||Potential cons|
|No income tax or penalty fee on the loan proceeds||Loss of investment gains on the money withdrawn|
|Interest rates tend to be relatively low||Not all plans permit loans|
|Interest payments are to yourself, not a bank||Limited to how much you can borrow—lesser of $50,000 (reduced by the highest outstanding loan balance during the preceding 12-month period) or 50% of your vested account balance|
|No credit check or minimum credit to qualify||Only current employees can initiate a loan, and if you leave your employer, you typically need to pay the entire amount back at once or face taxes and penalties; however, some 401(k) plans permit terminated employees to continue loan repayments|
|No requirements for how you spend the money||Subject to the provisions of your plan, the maximum loan term is five years, unless the loan is for the purchase of your primary residence|
|Repayments are automatically taken from your paycheck until the loan is repaid||Interest payments aren’t tax deductible|
|You can continue saving in your plan while you have an outstanding loan||You may be charged loan processing and maintenance fees|
Remember—check your SPD or plan highlights to make sure your retirement plan offers loans and learn about any specific requirements to take one. Compare it to alternative sources of money—a personal loan, home equity line of credit, or something related—to determine what makes the most financial sense for you.
Hardship withdrawals—what’s considered a hardship?
A hardship withdrawal is reserved for situations when you have an immediate and heavy financial need and you can’t reasonably find the money from alternative sources. In these instances, you can withdraw the amount you need and no more.
You don’t pay back your hardship withdrawal—unlike a loan, it’s taxable income to you. And if you don’t qualify for an exception, hardship withdrawals can also be subject to the 10% early withdrawal penalty.
Several predetermined financial hardships that automatically qualify you for a hardship withdrawal are:
- Medical care expenses for you or your family/dependents
- Purchase of your primary residence
- Tuition, related educational fees, and room and board expenses for the next 12 months of postsecondary education for yourself or your family/dependents
- Payments needed to avoid eviction from your primary residence or foreclosure on the mortgage
- Funeral expenses for yourself or your family/dependents
- Certain costs to repair damage to your primary residence that would qualify for a casualty deduction under the Internal Revenue Code
- Expenses and losses, including loss of income, due to certain federal disasters declared by the Federal Emergency Management Agency (FEMA), provided your primary residence or principal place of employment at the time of the disaster was in an area declared by FEMA to be eligible for individual assistance
Hardship withdrawals aren’t applicable to 457(b) plans; instead, 457(b) plans can permit unforeseen emergency withdrawals. The two are similar in spirit—withdrawals for people facing financial hardship. Where they differ is that a hardship withdrawal can be an expected cost, where an unforeseen emergency withdrawal needs to be unexpected.
Remember—check your SPD or plan highlights to make sure your retirement plan offers hardship or unforeseen emergency withdrawals and learn about any specific requirements to take one.
Withdrawals, loans, and hardships—you have options
Your retirement savings shouldn’t be your first option for getting cash but may be available as an option to consider. What you need the money for and whether you want to pay yourself back will help determine if a withdrawal option or loan is appropriate. Keep in mind that withdrawals requested before age 59½ are subject to a 10% early withdrawal penalty, unless an exception applies.
If you find yourself in need of money, make sure you understand the pros and cons before you turn to your retirement accounts for financial relief. You may wish to contact a tax advisor or financial professional to discuss the tax consequences and financial impact of taking a withdrawal or loan from your retirement plan.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
MGTS-P46613 -GE 3/22 46613 MGR0304222034905