The simplest way to borrow against your 401(k) retirement plan is to take a temporary distribution of funds in the form of a loan. According to the IRS, many 401(k) plans allow participants to borrow tax-free funds from their account as long as the loan is 50 percent of the total balance or $50,000, whichever is less, and the loan is repaid within five years in relatively equal quarterly installments.Continue Reading
Another way to make a tax-free withdrawal is to take a hardship distribution. However, the IRS specifies that this is only allowed if the participant has a heavy and immediate need for funds that could not be satisfied through other means, such as typical loans or liquidation of personal assets. In addition, such distributions typically can only include employee contributions, not employer matching or accrued interest. This type of distribution is generally granted for things such as medical expenses, tuition payments, eviction from a primary residence or funeral costs.
While the IRS allows account holders to take discretionary distributions before age 59 1/2, not only do the funds need to be reported as income on your taxes, an additional 10 percent tax is assessed unless the withdrawal falls into one of the short list of exceptions, such as for the payment of allowable medical expenses or because of an IRS-approved disaster.Learn more about Financial Planning
Owners of 401(k) plans can withdraw funds without penalty if they are at least 59 1/2 years old, become completely disabled, or roll the funds over into another qualified retirement plan or individual retirement arrangement, reports the Internal Revenue Service. People can also withdraw funds penalty-free if the distribution qualifies as an exception. Beneficiaries of decedent 401(k) owners can withdraw funds without penalty.Full Answer >
The benefits of a defined contribution plan include having control over the plan, the ability to transfer funds, access to equal benefits and possibly having access to greater funds during retirement, according to FinancialWeb. A defined contribution plan is a type of retirement plan often used as an alternative to a defined benefit plan.Full Answer >
An individual with a 401(k) retirement plan has the option of direct rollover into an individual retirement account, transferring funds to a new employer plan or keeping the funds in the old employer's plan. Taking a taxable distribution allows access to savings but comes with income tax payments, according to New York Life Insurance Company.Full Answer >
Employees who leave federal service can withdraw money from their Thrift Savings Plan or roll over the funds to an IRA or an employee-sponsored retirement plan once the new account is active. Employees may have to pay taxes and penalties on withdrawals and transfers, depending on their age and the types of their investments, according to TSP.gov.Full Answer >