(NewsNation) — As of September last year, $8.9 trillion was sitting in 401(k) retirement accounts, according to the Investment Company Institute, an investment association.
The association reports that more than 715,000 people have 401(k) plans, which are employer-sponsored retirement savings accounts.
Typically, account holders wait until they’re in retirement to withdraw the funds — but some may find themselves needing to access the money early.
All withdrawals, early or not, are taxed as ordinary income, but early withdrawals are subject to a 10% fee.
The Internal Revenue Service considers “early” withdrawals before the age of 59 1/2.
Financial experts recommend against withdrawing from a 401(k) plan early.
“In most cases, it would be better to leave your retirement savings fully invested and find another source of cash,” financial services company Fidelity Investments said.
One may consider filing a hardship distribution request with the IRS to avoid penalties. Hardship withdrawals are “made because of an immediate and heavy financial need.”
If a hardship cannot be demonstrated, a 10% fee will apply. That means if you take out $20,000, you’re out $2,000 in addition to taxes.
The IRS offers another provision to avoid the withdrawal penalty. The Rule of 55 states that someone who leaves or loses their job after age 55 and withdraws from a 401(k) will not have to pay a penalty fee.
“Even if you’re eligible to withdraw money penalty-free from your 401(k) or other qualified retirement plan early, consider taking early distributions carefully,” financial services company Charles Schwab said. “Just because you can take withdrawals, doesn’t mean you should.”
401(k) loans are an alternative to withdrawing early. You can take out a loan from the account without having to pay taxes or fees. The interest you pay goes back into the account.
