Best Ways to Use Your 401(k) Without a Penalty
If you take funds out too early, or before the age of 59-1/2, the Internal Revenue Service (IRS) could charge you with a 10% early withdrawal penalty plus income taxes.
However, life events can happen, which might put you in a position where you need to tap into your retirement funds earlier than expected. The good news is that there are a few ways to withdraw from your 401(k) early without incurring a penalty from the IRS.
- If you qualify for a hardship withdrawal, certain immediate expenses won't incur a tax penalty, including education, healthcare, and primary residence expenses.
- You may also be eligible to take a loan from your 401(k), which incurs neither penalty nor taxes, but the loan must be repaid.
- There are also special circumstances where you can withdraw funds penalty-free from a recent employer if you have reached the age of 55.
The simplest and best way to tap your 401(k) without incurring a tax penalty is to use it for the purpose it was intended for—providing retirement income. However, read this article if you need money for a major expense.