Can I Use My Money Before I Retire?

With any pension or retirement plan, the aim is always to leave the money untouched until you retire so that you can make sure you have enough funds for this part of your life. However, there is no denying that circumstances could arise that may require you to change your thought process. If you are currently thinking about taking money from your 401(k) prior to your retirement, this blog post will provide you with some useful advice on doing so.

You can withdraw money, but there are penalties 


Typically, you will need to ensure that the funds are kept in the plan until you reach the age of 59-and-a-half-years-old. You can withdraw money before this but you will be hit with a pretty substantial penalty of 10 percent. This is on top of the regular income tax that is applied to all withdrawals. This can mean that you are sacrificing quite a large sum of money in order to make a withdrawal.

However, it is worth noting that there are some exceptions. The 10 percent penalty will be waived by the IRS for certain ‘hardship’ withdrawals. Of course, this will differ from plan-to-plan, so you do need to check yours to be certain. Nevertheless, you could be able to make a withdrawal before you reach the age mentioned if you are using the money for one of the following things…

Payments you need to make in order to stop a foreclosure or eviction
Higher education expenses, for example, paying to send your children to college
Costs after the onset of a sudden disability
Buying your first property

You are advised to deem this a last ditch option, though. After all, there is a very good reason why your money has been put in a plan for your retirement, and this is to make sure you have enough money to live when you no longer have an income coming in.

What about a 401(k) loan?


Another option is to take out a loan on your plan. A lot of the 401(k) plans available today give you the option to borrow against the amount that is in your account. If you go down this route, you need to repay the money to your account within a set period of time. This will typically be a few years. If you do not pay the loan back, it will be deemed a cash withdrawal from your plan. This means you will have the 10 percent penalty to pay and you will owe taxes on the sum, so it is really important to make sure that you can manage the repayment schedule.

It is important to be aware of the drawbacks that are associated with taking out a loan. The most oblivious being the fact that you will lower the sum of money that you have in your plan, which is currently growing for your retirement years. Not only this, if you decide to change jobs or you are made redundant, you have to pay the outstanding loan within a matter of months. You will also need to pay interest on the amount you borrow too. Want to learn more? Visit SW Pension Services today for more information!

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