How to withdraw money from your 401(k)

Core Insights - The article discusses the rules and implications of 401(k) withdrawals and loans, emphasizing the penalties for early withdrawals and the differences between traditional and Roth 401(k) accounts [1][3][4] 401(k) Withdrawals - A 401(k) withdrawal permanently removes funds from a retirement account, with penalties for early withdrawals before age 59 ½, typically incurring a 10% penalty plus taxes [3][10] - Traditional 401(k) withdrawals are taxed as ordinary income, and a 10% penalty applies if taken before age 59 ½ [4][5] - Roth 401(k) withdrawals can be tax-free if the account has been held for at least five years and the account holder is at least 59 ½ [7][8] - Early withdrawals from a Roth 401(k) incur taxes and penalties on the earnings portion of the balance [8] 401(k) Loans - A 401(k) loan allows borrowing against the retirement account, typically up to 50% of the vested balance or $50,000, with no taxes or penalties if repaid [12][13] - Repayment of a 401(k) loan is usually required within five years, and payments are often deducted from paychecks [13] - If employment ends, the repayment timeline for a 401(k) loan may be accelerated, posing a risk if the loan cannot be repaid [14][17] Exceptions to Penalties - Certain circumstances allow for penalty-free withdrawals, such as the Rule of 55, hardship distributions, and substantially equal periodic payments (SEPP) [15][16] - The Secure Act 2.0 introduces provisions for penalty-free emergency withdrawals and other exceptions for specific situations [15] Alternatives to Withdrawals - The article suggests considering alternatives to withdrawing or borrowing from a 401(k), such as using savings accounts, Roth IRAs, health savings accounts (HSAs), home equity, personal loans, or credit cards [16][18] - It emphasizes that taking money from a 401(k) should be a last resort due to potential penalties and lost investment growth [16] Contribution Limits - Individuals aged 50 and above can benefit from higher contribution limits to their 401(k), with additional contributions allowed in 2025 and 2026 [17][19]