The 401k Penalty Discussion - The Bills.com Blog
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The 401k Penalty Discussion
Question: Can I withdraw money from my 401K without penalty for first time home purchase?
Answer: If allowed by your employer or 401k plan administrator, you may be able to withdraw money from your 401k for the purchase of a home, but the withdrawal will not be penalty free.
You will be required to pay taxes at your regular income tax rate on funds you withdraw from your 401k, plusa 10% penalty for the early withdrawal. This could mean that if you withdraw $10,000, you may only end up with $6,000 (or less) in you pocket. Some withdrawals can be made without penalty, but these usually require a true financial hardship; the purchase of a home generally does not qualify for a penalty free withdrawal. Clearly, you should avoid withdrawing funds from your 401k if at all possible, as you will probably lose a lot of money in the process.
Here is more details about 401K withdrawal rules .
You could explore borrowing against your 401k, with no penalty.
Every employer offering a 401k plan for its employees decides what withdrawals it will allow from its 401k plan, and under what circumstances. In fact, some employers do not allow withdrawals at all, except under very limited circumstances. To find out the rules regarding withdrawals from your 401k plan, you should discuss the plan with your employer or your plan administrator. Some employers allow 401k participants to borrow money against their plan account rather than withdrawing funds from the account.
If allowed by your employer, this type of loan can be good way to utilizing the funds in your account without paying tax penalties for a withdrawal. Again, ask your employer if it offers this type of loan option to employees.
Many informative resources regarding 401k plans are available on the internet. One site offering practical advice about 401K withdrawals .
The IRS also offers a “Frequently Asked Questions” section about 401k plans .
Also, make sure to get a free financial health check-up with Bills IQ!
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1. Posted by Tara on Wednesday 6th February 2008 08:04
I am thinking about quiting my job and I have a 401k. What is the penalty if I withdraw it and don't invest it? I have several credit card bills that need to be paid off with it if I am able to stay at home with my new baby.
2. Posted by Nathan on Thursday 7th February 2008 08:33
If you cash out your plan before you are the age of 59 1/2 you will be subject to the regular income tax plus a 10% early withdrawal penalty. You should speak to your plan administrator to find out the exact cost involved.