When Can You Cash in Your 401k Without Penalty

When can you cash in your 401k without penalty? With the recent downturn in the nation’s economy, many people have had to raid their retirement savings to make ends meet.

People frequently ask the question: When can you cash in your 401k without penalty?

The money in a 401k plan is tax-deferred, which means that taxes are not paid on the funds until they are withdrawn.

This tax cannot be avoided, but there is also a 10% early withdrawal penalty that can hit most people if they withdraw their funds early.

Wait to take out your money until age 59 1/2 if you want to be sure to avoid paying penalties when removing funds from a 401k.

The law governing these accounts currently has an age limit of 59 1/2 for general withdrawals for people who are working.

Cashing in a 401k plan with no penaltiesThe withdrawals that occur after this age should generally be spread over the course of several years to avoid running out of funds before death.

These withdrawals must begin before age 70, but there is an exception to this age. Those who lose their job after age 55 can also withdraw funds without penalty.

There are also a few other instances in which these funds can be withdrawn without penalty.

If you die early, you can obviously avoid paying the penalty. The beneficiaries or estates of those who die before reaching the unrestricted distribution age can receive the money without penalty.

Of course, this is not really considered a viable option for most people.

If you become disabled you can avoid early withdrawal penalties. Those who are permanently disabled can withdraw funds from their 401k accounts without penalty.

However, the disability must be considered complete for a waiver from the penalty.

A decision to join the reserves can keep you from paying penalties on funds withdrawn from a retirement account.

Qualified reservists who saw active duty can withdraw funds penalty free. However, this only applies to those who served between September 11, 2001, and December 31, 2007.

You can also pay medical bills with 401k funds penalty free. In any year that a person’s medical bills exceed 7.5% of their adjusted gross income, that person can withdraw funds equal to the amount of their medical bills.

They must reach the 7.5% limit to qualify, however.

These are just a few examples of circumstances that you can consider when determining when you can cash in your 401k without penalty.

A more tedious breakdown of additional factors that would allow you to cash out the money should have been included within the paperwork that you received for your 401k.

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