Borrowing or withdrawing money from your 401(k) before you retire is a big decision. After all, you’ve worked hard and saved hard to build up your retirement fund. While taking money out of your 401(k) plan is possible, it can impact your savings progress and long-term retirement goals so it’s important to carefully weigh the risks, costs and benefits. Show Most people have two options:
Whether you’re considering a loan or a withdrawal, a financial advisor can help you make an informed decision that considers the long-term impacts on your financial goals and retirement. Here are some common questions and concerns about borrowing or withdrawing money from your 401(k) before retirement. A 401(k) loanA 401(k) loan allows you to borrow against your own 401(k) retirement account, or essentially borrow money from yourself. While you’ll pay interest similar to a more traditional loan, the interest payments go back into your account so you’ll be paying interest to yourself. People borrow from their 401(k) for a variety of reasons, such as funding the purchase of a house or paying for a dependent’s college tuition. While there are some plans that only allow participants to take a loan for certain approved reasons, in most cases, you won’t need to declare why you are borrowing from your 401(k). Common 401(k) loan questionsCan I borrow against my 401(k)? How much can I borrow against my 401(k)? How often can I borrow from my 401(k)? What
are the rules for repaying my 401(k) loan? What if I lose my job before I finish repaying the loan? What happens if I don’t comply with the 401(k) loan repayment rules? Summary of loan allowances
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| Advantages of a 401(k) loan | Disadvantages of a 401(k) loan |
|---|---|
| Getting a 401(k) loan is generally a quick, easy process | Money removed from your 401(k) will not be able to grow and will not benefit from the effects of compound interest |
| If you follow the 401(k) loan repayment rules, you won’t be subject to taxes or penalties on the loan amount | If you don’t follow the 401(k) loan repayment rules, you may be subject to taxes and penalties |
| You don’t need a credit check for a 401(k) loan, and your credit won’t take a hit if you default | If you lose (or leave) your job while the loan is outstanding, you typically will have to repay your 401(k) loan within 60 days |
| Interest paid on the loan is not lost to a lender, because you are the lender | You must replace the money you borrowed from your 401(k) with post-tax dollars |
| There are no early repayment penalties if you pay off the loan early | You can’t deduct loan interest payments for tax purposes |
Withdrawals from a 401(k)
401(k) hardship withdrawals
If you find yourself facing dire financial concerns and need cash urgently, your 401(k) plan may offer a hardship withdrawal option. Unlike a 401(k) loan, you won’t have to repay the money you take out, but you will owe taxes and potentially a premature distribution penalty on the amount that you withdraw. In addition, IRS 401(k) hardship withdrawal
rules state that you may not take out more money than what is needed to cover your hardship situation.
In order to qualify for a 401(k) hardship withdrawal, your plan administrator must offer this option (not all of them do) and you must be facing an “immediate and heavy financial need.” Approved 401(k) hardship withdrawal reasons include:
Postsecondary tuition for you or your family
Medical or funeral expenses for you or your family
Certain costs related to buying, or repairing damage to, your primary residence
Preventing your immediate eviction from or foreclosure of your primary residence
If you experience a financial hardship from a circumstance not on this list, you may still be able to qualify for a hardship withdrawal, so check with your plan administrator.
In-service, non-hardship withdrawals
This type of withdrawal is only allowed under certain plans and is mainly used by those who would like to explore other investment options. Learn more about in-service distributions. An Ameriprise financial advisor can provide more detailed information on in-service 401(k) distributions.
Pros and cons of withdrawing money from your 401(k)
| Pros | Cons |
|---|---|
| You’ll get access to cash quickly | You’ll be taxed on the amount that you take out |
| If you’re under 59.5 years of age, you’ll be subject to a 10% 401(k) withdrawal penalty | |
| It may affect your long-term retirement savings goals |
Withdrawing vs cashing out your 401(k)
Withdrawing money from your 401(k) is not the same thing as cashing out. You can do a 401(k) withdrawal while you’re still employed at the company that sponsors your 401(k), but you can only cash out your 401(k) from previous employers. Learn
what do with your 401(k) after changing jobs.
401(k) loan or withdrawal - is it a good idea for me?
Taking money out of your 401(k) plan is a big decision that can impact your savings progress and long-term retirement goals. If you’re contemplating this option, consider connecting with an Ameriprise advisor. They’ll work with you to carefully weigh the risks, costs and benefits.
