This is the conclusion of a two-part series about 401(k) withdrawals.
The Loan Option
If a withdrawal is not allowed, the plan may offer a loan provision. The loan size is typically the lesser of $50,000 and 50% of your vested account. A 401(k) loan involves cash being made available within the account, usually after paying a processing fee, and then paying back the principal. How the interest rate is calculated is within the SPD, but that interest will go directly to you, because you are the lender as well. While receiving the interest is good and a forced way to save more, it is important to note that none of the repayment is tax deferred or applies to company matching.
The Hardship Withdrawal Option
Another option to minimize early withdrawal penalties can be a hardship withdrawal, although this is subject to applicable income taxes. A hardship withdrawal can be taken without penalty, provided that it is for one of the acceptable reasons:
Options when you leave your job
You may wonder what becomes of your 401(k) if you leave your job. Depending on your employer’s rules for retirement plans, you might be able to leave your account where it already is. This is the simplest option, though it is rarely the most beneficial long term. You should be able to roll over the money from the old 401(k) into a new account with a new employer, or into an individual retirement account (IRA).
If you have the option to roll the 401(k) account into an IRA, this typically is the best move. An IRA will grant you far more investment access and freedom than exists in a 401(k) account.
It is a good idea to speak with your financial advisor before deciding to take an early withdrawal or loan from your 401(k). This should only be considered after careful review of all other options, and it is usually advised in cases of emergency only. Keeping an adequate emergency fund is a good way to avoid needing to take an early withdrawal and the associated penalties.
If things are feeling financially tight, don’t panic by diving into your 401(k) just yet. Call Ambassador Advisors today, if you have questions about how your individual situation could impact your 401(k). We can help you review your options and navigate the best course for your current circumstances.
Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights
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