July 2, 2018
By Mary Beth Eastman

When You Should Consider Drawing From Your 401(k)

Simple. Thrifty. Living.

Ideally, your 401(k) account remains untouched until you’re ready to retire. During that time, you make contributions, enjoy a tax break and watch the value grow. Some people, however, discover that they need to withdraw money from their 401(k) accounts before they reach retirement age.

There are some legitimate reasons to take money out of your 401(k). Typically, you will have to pay a penalty, but it is possible to access the money you’ve saved as long as you plan to use it for certain purposes.

If you need a medical procedure to save your life or significantly improve the quality of your life, then you may want to draw money from your 401(k) account. Medical debt is the number one cause of bankruptcy in the United States, so it makes sense to access the money if you can.

For the most part, you will pay a penalty of 10 percent for making an early withdrawal. There are two exceptions, though. You never have to pay a penalty if you’re 59.5 years old or older. You can also avoid the penalty if your medical expenses are more than 7.5 percent of your household’s adjusted gross income.

Even if you get to avoid to avoid penalties by paying off medical debt, you will still pay taxes on the money you withdraw.

Even if you get a mortgage, it’s difficult for most Americans to save the money that they need to purchase homes. Most lenders won’t approve mortgage applications unless you have at least 10 percent of the property’s value. If you’re buying a home worth $200,000, then you need at least $20,000 to get a mortgage. You’d need about $40,000 to avoid the extra expense of private mortgage insurance.

Although you can use money from your 401(k) to buy your principal residence, you will pay a penalty of at least 10 percent unless you’re 59.5 or older. Again, you’ll also need to pay taxes on the money you withdraw.

In 2007, the U.S. had a 2.62 percent foreclosure rate. Foreclosures, along with several other factors, nearly destroyed the global economy. Thankfully, the foreclosure in 2018 is just 0.53 percent. Still, foreclosures cause significant financial hardship for families and communities. If you’re facing a foreclosure, then you can save your home by withdrawing money from your 401(k).

Unfortunately, you will have to pay the 10 percent penalty to avoid foreclosure. Still, losing 10 percent of your withdrawal amount is probably better than losing your home.

Once you reach 59.5 years old, you can withdraw from your 401(k) without penalty. Until then, you will face penalties and taxes even when you’re allowed to take money from your account.

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