Rules on Using 401(k) Money Before Retirement

By Sam Feeder , last updated January 10, 2012

There are specific rules on tapping your 401(k) money before retirement that are meant to dissuade people from using it before the proper age, as the money is meant to be used when you are no longer working. The 401(k) is one of a number of methods that the government endorses as a retirement fund, so that they do not have to worry about their income when they are not working. While the money in your 401(k) is yours, you are not allowed to touch it until a certain time, and are only allowed to borrow against it in certain circumstances. Take a look at the more specific rules regarding tapping your 401(k) money before retirement listed below.

Age You can Access It

You aren't allowed to access your 401(k) account in general until you are at least 59 and a half years of age, unless you want to pay a penalty of ten percent of the total value of the 401(k), as well as significant income tax. This is the first and most important rule about accessing your 401(k) before the proper retirement age (at least according to the government), and one that most people know going into their 401(k) plan.

Loans Against the 401(k)

All 401(k) plans have serious loan provisions, to make it difficult and dissuade people from borrowing money against their 401(k) plan before retirement. Still, you can borrow against the 401(k) in a specific way without incurring penalties as long as you pay it back before the age of 59 and a half, when you are allowed to access your 401(k). Usually you can borrow up to half of your vested account balance as long as it is not more than fifty thousand dollars total. You usually have about five years to pay back this loan before penalties start piling up, though this time limit can be extended if the money is used to put a down payment on your house. However, the major downside of this is that you will start to lose a lot of your money when you can't pay it back through penalties, and you are no longer saving money and earning interest on your 401(k) account.

Lack of Access

When you access your 401(k) too early, you also lose the ability to make further contributions to it. This means that not only will you have to pay a lot of money in taxes and penalties from the account itself, it means you won't be able to earn any money on it from your actual income that you would otherwise be contributing to it. This is an additional loss of money that would otherwise be coming to you through your 401(k) plan. In other words, accessing your 401(k) should truly be something you do as a last resort.

Related Articles
When deciding to rollover a 401(k) retirement plan there are a number of rules to be aware of. Following these rules is very important in order to avoid being ...
Should you need to withdraw money from a 401(k) account before you hit retirement age, you may have to pay a penalty, as well as tax on the amount you take out ...
About -  Privacy -  AskEraser  -  Careers -  Ask Blog -  Q&A -  Mobile -  Help -  Feedback © 2014