Comparative assessments and other editorial opinions are those of U.S. News and have not been previously reviewed, approved or endorsed by any other entities, such as banks, credit card issuers or travel companies. The content on this page is accurate as of the posting date; however, some of our partner offers may have expired. *Distributions from your QRP are taxed as ordinary income and may be subject to an IRS 10% additional tax if taken prior to age 59 1/2. You avoid the IRS 10% additional tax, if you left your employer in the year you turned age 55 or older (age 50 for certain public safety employees). There are other exceptions to the IRS 10% additional tax for early distribution including: your death, being disabled, eligible medical expenses, taking substantially equal periodic payments (SEPP), qualified reservist distribution, birth or adoption expenses (up to $5,000), and involuntary IRS levies. Please visit IRS.gov for a complete list. Show The financial calculator results shown represent analysis and estimates based on the assumptions you have provided, but they do not reflect all relevant elements of your personal situation. The actual effects of your financial decisions may vary significantly from these estimates - so these estimates should not be regarded as predictions, advice, or recommendations. This information does not constitute an application, offer or commitment by Wells Fargo & Company, or a representation of interest rates, investment performance or any other future performance. The accuracy of this calculator and its applicability to your circumstances is not guaranteed. You should obtain personal advice from qualified professionals. This information is provided for illustrative purposes only and is not intended to constitute legal, financial, or other advice. Wells Fargo Advisors and Wells Fargo & Company do not provide legal, accounting, or tax advice. Please consult your tax or legal advisors before taking any action that may have tax or legal consequences. Technically, you’re not supposed to touch the money in your 401(k) until you’re at least 59 1/2—and for good reason. Unless you’re in dire straits, it’ll cost you. The IRS charges a 20% tax withholding and a 10% penalty for early withdrawals. Plus, if you spend the money in your 401(k), it’s no longer there for you in retirement. That said, there are some ways to access your savings before age 59 1/2 without paying a penalty. (You’ll still be taxed.) But read the fine print, and tread carefully. Remember: This is your nest egg we’re dealing with. What an Early 401(k) Withdrawal Might Cost YouYou know how a new car loses a chunk of its value the minute you drive it off the lot? It’s similar when you take an early withdrawal from your 401(k). The amount you planned to get shrinks—by a lot:
But if you must, you must. So if you can find a way to sidestep the 10% zinger, that’s at least some consolation. Exceptions to the Early Withdrawal PenaltyIf you become or already are permanently disabled, you would still owe taxes on an early withdrawal, but you likely wouldn’t owe a penalty. If you die and your beneficiary inherits the 401(k) funds, those distributions would be taxed, but the beneficiary wouldn’t owe the 10% penalty. These are the simple, logical exceptions. But, assuming your 401(k) plan allows early withdrawals (not all do, so please check), there are other circumstances under which you may take an early withdrawal and pay the tax, but avoid getting hit with the additional 10% penalty. Let’s start with so-called “hardship” withdrawals. What Qualifies as a 401(k) Hardship Withdrawal?Different 401(k) plans may have different rules, so again, check with your plan administrator about whether you qualify for a hardship withdrawal. But the IRS defines it as “an immediate and heavy financial need.” Here are some examples:
Before you can qualify under one of these conditions, you’ll need to prove that you can’t get the money any other way, and you won’t qualify for more than the hardship amount. Other Penalty-Free Withdrawal OptionsIf you don’t meet the criteria for a hardship withdrawal, there are some other ways you might be able to avoid paying that extra 10%. In all of the cases listed below, the restrictions can be complicated, so make sure you qualify:
This is not an exhaustive list, so if you believe your situation may allow you to avoid a penalty, it’s a good idea to inquire. For a full list, visit the IRS “exceptions to tax on early distributions” page. The Bottom LineLife happens, but tapping your 401(k) is not the only solution. You can consider a 401(k) loan, where you wouldn’t owe taxes or pay a penalty. But 401(k) loans come with stringent repayment terms. Personal loans or home equity loans and lines of credit might also be feasible options. But you have to consider the long-term repayment costs of taking on debt. The most important thing is to explore all your options and minimize the price you pay now—and the cost to you in the future. |