how can you withdraw 401k funds without being penalized? Is there a loophole?

Question

Can you move the funds to an account and liquidate some?

Answer 1

First of all, since the money in the fund is pre-tax, when it is pulled out, it is always taxable income. Nothing at all prevents this from happening. Therefore, you will add it to your regular income to determine your taxes for the year.

In addition to that, if you pull the money out before the year in which you turn 59 1/2, you have to pay a 10% penalty. To avoid the penalty, you:

- must be disabled

- must be deceased

- used the money to pay for medical expenses which exceed 7.5% of your adjusted gross income (the bottom number on the front page of your 1040)

Another thing you could do is rollover the money into an IRA. Once in the IRA, you could pull the money out and, to avoid the penalty, you could use it to (in addition to the above mentioned items):

- pay for medical insurance after losing your job

- pay for higher education expenses (tuition, fees, books, expenses)

- pay for the purchase, building, or rebuilding of your first home (by definition, a first home is when you or your spouse had no interest in a home in the last 24 months prior to the purchase of the new home)

Any other withdrawal will suffer the 10% penalty. All withdrawals will be included as taxable income regardless. The taxable income usually kills you more than the penalty does. Try as hard as you can to leave the money in your retirement. It will be needed when you retire and it is hard to build back up.

Best of luck!

Answer 2

There are reasons you can withdraw and avoid the early withdrawal penalty, but you will still be taxed on the withdrawal - - check with your plan administrators.
Also, you could qualify for a loan against your 401k where there is no taxation unless you default on the loan repayment.

Answer 3

The IRS does allow an exception to the 10% early withdraw penalty for a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service).

I don't know if this helps in your situation.

Answer 4

You may be able to take money out as a loan, but you have to pay it back within a certain time period - its late so I dont remember how long, but goto the IRS website and look up forms and publications on the left-hand side, then look for retirement plans.

Also, you may be able to deduct for certain events with incurring the 10% penalty, such as medical costs, education, home purchase, etc.

Answer 5

You can take a loan. There's minimal tax taken if you take money out for down payment on a first home or for some educational costs.

More info at http://www.irs.gov

Answer 6

No way to avoid the tax and penalty on early withdrawals.

Answer 7

the best place to get this type of info.,is clark howard.com