Better to withdraw funds from a 401K or IRA?

Question

Assuming you can withdraw early from an IRA account.

Right now I have a 401K and I might need to take an emergency withdrawal in the next couple of months. I know there is a penalty. Would it be better to roll over to a roth ira right now and withdraw in a couple of months? What kind of penalties am I looking at?

Answer 1

Neither is good to withdraw from. You are looking at about 40% in fees and penalties. And if you loose your job (where the 401k) is at and you haven't paid back the loan, the government will assume you did an emergency withdraw.

I urge you to try and scrimp and save for what ever your emergency is (or ask for a payment plan with what you need to do).

Answer 2

If you're still employed you can't roll your money from your 401k into an IRA. You have to no longer work for your company to have a rollover. You can take a hardship withdrawal if you're still employed, but you may be limited in how much you can take (some plans may not even allow this. They are not required to do so).

If you take the withdrawal you will incur a 10% extra tax (most call it a penalty but it's just a tax). There are exemptions for it but you don't say why you need it or how old you are so can't tell you if you qualify for one of those exemptions.

They will allow you to take more than you actually need to cover the withholding and the 10% tax. So if you need 10k they will let you actually take 13k.

More than the penalties, the worst thing is what this does to your retirement. If you still have 35 years left to work, for every 10k you take now you will be chopping 125k off your retirement balance. so ask yourself if that emergency withdrawal is THAT necessary. In addition, you won't be able to contribute to your plan for 6 months afterwards so you'll take a further hit there.

If it is, then first consider taking a loan from your 401k. If you take the loan then the damage is limited somewhat. You repay yourself, plus interest. And the damage to your account is limited to the differential between what your account earns and the interest rate being charged.

If you don't think you can afford the loan and continue the deferrals? Stop making the deferrals; even taking the loan and stopping your deferrals while you repay the loan is better than taking the hardship withdrawal. That should be an absolute last resort.

If you're no longer employed by the company that has your 401k then take a cash distribution only in the amount that you need(don't forget to gross up for that 10%) and roll the rest into an IRA.

If you're employed by a different company but have a large 401k balance at an old company? roll it over into your new company and take a loan. Follow earlier processes in stopping deferrals and such.

Answer 3

Don't know your age, but there are several disadvantages. You will need to request about 125% of the amount that you need, 10% will be deducted as a tax, another 10% will be deducted as a penalty (unless you are 59-1/2). This will make you inelgible to contribute to this fund until the next open sign up with your company. Consequently your employer will not make any contributions either. I did much the same about 10 years ago, and it ended up costing thousands. Not trying to chastise, but it will end up costing you in the long run. Only piece of advice I can give is documenting a medical hardship or showing that you will lose your home if you do not make the withdrawal. This could save the 10% early withdrawal penalty. IRS has some pretty tough rules, you will have to dig up quite a bit of paperwork. Talk to your HR or plan adminstrator at work for more details. Good luck!

Answer 4

There is no penalty to 'borrow' the money from your 401k. Your company's 401k should have loan provisions. If you borrow your own money you can pay yourself back interest (into your 401k). You can't just take the money out of the 401k if you still work for that employeer. If you don't work for the same company, roll the 401k into an IRA, take what you need and if you can pay it back within 60 days there is no tax or IRS penalty.

Answer 5

As far as I know, you cannot withdraw from a roth until retirement. With a 401 you could probably make a withdrawal without penalties if it meets certain criteria.