Sometimes, it is necessary to consider taking money out of your 401(k) for emergency purposes. Of course, the 401(k) is normally intended to invest money tax deferred that can grow over time and make it so that you can have an income to live off of when you retire from work. However, since the IRS allows you to not pay taxes on this money until retirement, it restricts premature withdrawals --- those made before age 59 1/2.
Normally, you can take a loan from your account for the lesser of 50 percent of your vested account balance or $50,000. There may be a minimum required amount you must borrow, such as $1,000. You would have to have a vested account balance of at least $2,000 to take a $1,000 loan. Additionally, some plans only allow one loan at a time, and you must pay off your loan before you can take a new loan, and you may have a waiting period before you can take a new loan. Once you take the loan, you will arrange some kind of repayment plan, which is normally taken directly out of your paychecks after taxes over a set number of years.
If you make after-tax contributions to your 401(k) plan, your plan might allow you to take a permanent withdrawal of the after-tax portion of your account balance without any kind of tax consequences. This means that you will not and cannot pay back the withdrawal, so you will be realizing any loss or gain of the sale of your investments. If your plan allows you to also withdraw any earnings on your after-tax contributions, you will owe taxes on the earnings. For example, if you contributed $1,000 and earned $100 and you withdraw the entire $1,100, you will only be taxed on the $100 earnings.
Once you stop working for your employer, your plan may allow you to withdraw your entire account balance, but there are tax consequences. If you retire from your employer in or after the year you turn age 55, you can take a withdrawal without an early withdrawal penalty. Therefore, you will only be subject to income taxes. However, if you retire before the year in which you turn age 55 and you take a permanent distribution, you will be subject to income taxes plus a 10 percent early withdrawal penalty.
While you are still working for the employer that sponsors your retirement plan account, you may be able to take withdrawals beginning at the age of 59 1/2 without the 10 percent penalty. Only the income taxes will apply.
If you are still working for your employer and are under the age of 59 1/2, you may only be allowed to take a permanent withdrawal due to a hardship if you qualify. You will normally be required to take all possible loans from your account before you can take a hardship withdrawal. The types of things the IRS has deemed as a qualifying hardship situation include unreimbursed medical expenses for you, your spouse, or your dependents; the purchase of your primary residence; the payment of college tuition and related expenses for you, your spouse, or your dependents; prevention of eviction or foreclosure on your home; payment for funeral expenses; and payment for home repairs.
Once you reach the age of 70 1/2, you will be required to take a minimum distribution from your account every year. There will be a set amount you must withdraw and there are consequences if you do not take the withdrawal. This is because the IRS is looking to finally cash in on the taxes that you deferred for all those years. You will need to contact your plan about the specific rules and processes for taking money from your retirement plan account.