Penalty & Penalty Free Reasons to Pull Out Of A 401k

The decision to pull out of 401k can keep you up at night, weighing the pros and cons with the decision.  There are penalties as well as tax consequences you may incur that diminish the benefit.  Here are some situations you may find relevant.

Buying a Home/Higher Education Expenses  Note that these are not penalty free reasons if the money is coming from a 401k.  If it’s coming from a qualified, traditional IRA, you can pull out $10,000 and avoid the penalty.  If your pulling out to buy a home, you cannot have owned a home for at least the last two years.

Unreimbursed Medical Bills  You can pull out money to cover deductibles that exceed 10% of your adjusted gross income in the year that you got the original bill.  Before you do that, however, recognize that medical bills that exceed the insurance payments for Medicare, Medicaid, and HMOs may not be your responsibility.

Disability.  If you are declared permanently disabled you can pull money out of a retirement plan without the 10 percent penalty.

Death.  First, don’t try this one at home.  Second, there are circumstances where beneficiaries that take a distribution before 59 ½ could still pay a penalty.

401k Loan.  If you take a distribution from your 401K as a loan, you will not pay the penalties.  If you leave the company before you pay it back may be assessed the penalty and income taxes.

Word of caution.  “There is a hidden cost in taking an early distribution from your 401k called the opportunity cost.”, explains Melissa Haskins with Edward Jones.   “Let’s say you have at least 15 years before you retire and you take $10,000 out of your 401k that earns on average 5% per year.  The present value of that money is $10,000.  The future value of that money in 15 years is $20789.  This could be money used later on for any number of things to prime your finances to support you in your retirement.”

If you have questions as to the consequences of pulling out of a 401k, ask your investment adviser, or call for a free consult from Melissa Haskins at 813-685-5294

Make the Choice. Make the Change. Delta.