You depend on your 401K upon retirement. The money put toward your retirement fund will help you live a happy life once you retire from your current career. Unfortunately, there are times where you may find yourself in need of extra money. When you have nowhere to turn, your retirement fund might be an option. An estimated 32% of Americans have a 401k. The problem, however, is how to get penalty-free retirement fund withdrawals.
There are certain situations where a withdrawal from a 401K would not result in a penalty. We take a closer look at the main reasons you can make penalty-free withdrawals from a retirement fund.
Disability is something that can strike at any time – due to disease, an accident, or other potential causes. In this unfortunate event, you may find yourself unable to continue working and pursuing your career.
Should you be faced with disability, you may qualify for a penalty-free withdrawal from your retirement fund. There are certain conditions that need to be met, or you will be paying a 10% penalty fee. In particular, “permanent” and “total” disability are stated by the IRS.
You can provide reports from an insurance company that paid out for disability to the IRS. This might be considered proof to allow for a penalty-free withdrawal from a 401k.
Death is another reason for a penalty-free withdrawal. Again, certain rules and restrictions do apply. If the holder of the 401k dies, then a withdrawal from the retirement fund can be made by a beneficiary without paying a 10% penalty fee.
There are certain cases where the spouse inherits the IRA. In this situation, the spouse will need to pay a penalty if they withdraw prior to the age of 59 and a half.
3. Buying A Home
In certain cases, a person may qualify for a penalty-free withdrawal if they are buying a home. This primarily accounts for those who are buying a home for the first time. If a person owned a home before, but not in the last 24 months, then they may also qualify in some situations.
The maximum penalty-free retirement fund withdrawal that can be obtained for the purchase of a home is $10,000. This is often divided into multiple withdrawals, however.
4. Expenses for Education
If you are looking to obtain a new degree or want to put your kids into college, then there are also ways to obtain penalty-free withdrawals. It should be noted that the 401k should specifically allow hardships. You will also be making a withdrawal from the IRA and not directly from the 401k. Failure to follow these appropriate steps could lead to a 10% penalty fee.
Penalties applied to a 401k withdrawal can have a significant impact on your retirement later on. Understand the reasons why you can withdraw from a 401k without having to worry about penalty fees. If these are not reasons for your withdrawal, considering alternative options should be a priority.