No one starts a 401(k) or 403(b) workplace savings account and makes contributions with the intention of using their hard-earned money before retirement. However, if you find that you need money and there are no other options, you might be able to use your 401(k). In order to be able to retire when and how you want, it’s important to keep an eye on the long term while taking care of immediate needs.
You can take money out of your workplace savings plan (like a 401(k) or 403(b)) in a variety of ways, including loans and withdrawals.
Let’s examine the benefits and drawbacks of various 401(k) loans and withdrawals, as well as some potential alternatives.
If you quit or get terminated from your job, you can cash out your net outstanding balance minus any unpaid 401(k) loan.
401(k) withdrawals vs. loans: Look at the pros and cons
Your circumstances may allow you to receive a conventional withdrawal, such as a Medical costs, foreclosure, tuition payments, funeral costs, and costs (other than mortgage payments) associated with the purchase and repair of a primary residence are all taken into account by the IRS as immediate and severe financial needs. Additionally, some plans permit non-hardship withdrawals, but each plan is unique, so speak with your employer for more information.
Benefits: You are exempt from repayment for withdrawals and 401(k) assets.
Cons: Because withdrawals from 401(k) accounts are typically taxed as ordinary income, you won’t get the full amount of your withdrawal if you take a hardship withdrawal. Additionally, unless you fall under one of the IRS exceptions, a 10% early withdrawal penalty applies to withdrawals made before the age of 5912.
You draw funds from your retirement savings account with a 401(k) loan. You may withdraw as much as 50% of your savings within a 12-month period, up to a maximum of $50,000, depending on what your employer’s plan permits.
Keep in mind that, in most cases, you must return the borrowed funds plus interest within 5 years of receiving them. The maximum number of loans you may have outstanding from your plan is also determined by the rules of your plan. You might also need your spouse’s or domestic partner’s permission before taking out a loan.
Advantages: Unlike 401(k) withdrawals, 401(k) loans do not incur taxes or penalties. In addition, the interest you pay on the loan is added to your retirement savings. Another advantage is that because defaulted loans are not reported to credit bureaus, your credit score won’t be impacted if you miss a payment or default on your 401(k) loan.
Cons: You might have to pay back your loan in full in a very short period of time if you quit your job. However, if you are unable to repay the loan for any reason, it is considered a default, and if you are under the age of 5912, you will be subject to both taxes and a 10% penalty. Additionally, you won’t be able to invest the money you borrow in a tax-advantaged account, missing out on potential growth that could exceed the interest you would pay yourself in interest.
Immediate impact of taking $15,000 from a $38,000 account balance
Assumptions: See footnote 1.
Is it a good idea to borrow from your 401(k)?
It’s not a good habit to use a 401(k) loan for discretionary costs like entertainment or presents. Generally speaking, it would be better to find another source of funding and leave your retirement savings fully invested.
Contrary to what has been said thus far, borrowing from your 401(k) may be advantageous in the long run and may even improve your financial situation as a whole. For instance, using a 401(k) loan to settle high-interest debt, such as credit cards, may lower the amount of interest you pay to lenders. Furthermore, 401(k) loans are exempt from credit checks and do not appear on your credit report as debt.
A 401(k) loan can also be used to finance significant home improvements that increase the value of your home enough to make up for the fact that you are paying the loan back with after-tax money and any lost retirement savings.
Here are some useful hints if you decide a 401(k) loan is the right choice for you:
While you are paying off your loan, it may be tempting to reduce or pause your contributions, but doing so will jeopardize the success of your retirement plan.
Long-term impact of taking $15,000 from a $38,000 account balance
Assumptions: See footnote 2.
Consider other options first and only use your retirement savings as a last resort because withdrawing or borrowing from your 401(k) has disadvantages.
A few possible alternatives to consider include:
How do you take a withdrawal or loan from your Fidelity 401(k)?
You must submit a request for a 401(k) loan or withdrawal if you have considered all your options and determined that taking money out of your retirement savings is the best course of action. Log into NetBenefits®Log In Required to review your balances, available loan amounts, and withdrawal options if your retirement plan is with Fidelity. We can help guide you through the process online.
Next steps to consider
Log in to NetBenefits®Log In Required Easily access your workplace benefits with Fidelity.
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Please Click Here to go to Viewpoints signup page. 1. The withdrawal taxes and penalties total 37%, which is made up of 20% federal taxes, 7% state taxes, and a 10% early withdrawal penalty. In this fictitious withdrawal scenario, the account is debited for a total of $23,810, of which 37% ($8,810) is set aside for taxes and penalties and the remaining ($15,000) is received, leaving $14,190 in the balance. 2. In this fictitious withdrawal scenario, a total of $23,810 is taken out of the account, of which 37% ($8,810) is set aside for taxes and penalties and the remaining amount ($15,000) is received, leaving $14,190 in the account’s remaining balance at age 45. In this fictitious loan scenario, the term is 5 years, with repayment beginning at age 45, and the interest rate is 6 5%. The hypothetical 22-year period between 45 and 67 assumes a $75,000 annual income with a 1 percent interest rate. 5% increase yearly, a personal rate of return of 4. 5%, 5% from the employee’s portion and 5% from the employer’s portion. In both cases, it is assumed that no further loans or withdrawals occur over the hypothetical 22-year period. The earnings on your own account could differ from this example, and taxes are due when you withdraw money. Loans are paid back into retirement accounts using after-tax funds, and if those funds are withdrawn again, they will be taxed again. 3. It is typically advised that the person work with a financial expert who can provide careful and thorough analysis of any potential legal, tax, and estate implications if a home equity line of credit or personal loan option is pursued.
This information is provided for educational purposes only and is not intended to meet the specific investment needs of any one investor.
Fidelity does not provide legal or tax advice. The information provided here is of a general nature, and it shouldn’t be regarded as tax or legal advice. Consult an attorney or tax professional regarding your specific situation. Withdrawals of taxable amounts are subject to ordinary income tax and may incur a 10% IRS penalty if made prior to age 5912.
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What happens if you quit a job with an outstanding 401k loan?
While you might be able to continue making payments on the loan, most businesses require immediate repayment when you depart. And if you don’t pay what’s due, you might receive an unexpected tax bill.
Is debt considered a hardship for 401k withdrawal?
Money withdrawal from a 401(k) Not all 401(k) plans permit hardship withdrawals. That’s up to your employer’s discretion. Credit card debt typically does not qualify as a reason to make the withdrawal under the hardship rules, even if your 401k plan does permit them.