Owners of 401(k) accounts can take withdrawals before age 59 1/2 only for immediate financial hardships, such as medical expenses, funeral costs and college tuition for account owners and their children, according to the Internal Revenue Service. The IRS also permits withdrawals to cover some of the costs of purchasing or repairing a home. Account owners cannot use 401(k) withdrawals for regular mortgage payments, although owners can use the funds to prevent an eviction or foreclosure.Continue Reading
Although the withdrawals are necessary to cover financial hardships, account owners still must pay regular income taxes and a 10-percent penalty on the distributions. To take early withdrawals, individuals must demonstrate that their financial hardships are immediate and heavy, even if the expenses aren't necessarily unexpected, the IRS explains. Account owners must use their withdrawals for the stated purpose, and they can't roll the money over into another retirement account. Once account owners take a hardship withdrawal, they must wait six months to resume account contributions.
Individuals can also take loans from their 401(k) plans up to certain amounts, depending on the value of their accounts, the IRS notes. These distributions don't incur taxes or penalties as long as individuals repay the loan consistently and on time, and in accordance to IRS rules.Learn more about Financial Planning