Too much money in a 401K, what are the options??

Question

My sister is financially strapped and could really use some extra money. Is there any way she can get cash from her 401K without incurring penalties??

(Most people do not save enough for retirement, my sister's problem is therefore unique, she has saved WAY more than she will ever need)

Answer 1

Your sister can take a loan from her 401k up to 50% of what is in her account. She will then repay the loan through payroll deductions and the interest she pays is also credited to her account. There are no penalties incurred if she does this.

However, if she were to quit or lose her job for whatever reason, she will have to pay back the loan within 30 days or it will be considered a distribution which will incure a 10% penalty plus she will be liable for the taxes on the balance of the loan as ordinary income.

Answer 2

Good for your sister for saving more than she needed! It's nice to see a question here other than "How can I get more money?" :-)

My suggestion is to use the IRS rule 72(t). She needs to leave the company that runs her 401k first, but then she can take "Substantially Equal Periodic Payments" out of her 401k, before turning 59.5, without paying the 10% penalty. You don't give a ton of details, but from what you do say, it sounds like this is a good way to tide her over.

If she still works for the company that runs the 401k, then she should see if it's possible to take out a loan against her 401k through the company. Some companies allow this; others don't.

Good luck,

Doug

Answer 3

Take out a loan from the 401k.

-or-

Exceptions to the Early Distribution Tax Penalties
You do not have to pay the additional 10% tax penalty on your early retirement distribution if you certain exceptions.

Exceptions for Early Distributions from an IRA:

You had a "direct rollover" to your new retirement account,
You received a lump-sum payment but rolled over the money to a qualified retirement account within 60 days,
You were permanently or totally disabled,
You were unemployed and paid for health insurance premiums,
You paid for college expenses for yourself or a dependent,
You bought a house*,
You paid for medical expenses exceeding 7.5% of your adjusted gross income**, or
The IRS levied your retirement account to pay off tax debts.

Exceptions for Early Distributions from a Qualified Retirement Plan such as a 401(k) or 403(b) plan:

Distributions upon the death or disability of the plan participant.
You were age 55 or over and you retired or left your job.
You received the distribution as part of "substantially equal payments" over your lifetime.
You paid for medical expenses exceeding 7.5% of your adjusted gross income.**
The distributions were required by a divorce decree or separation agreement ("qualified domestic relations court order"),

* The home-buying exception has the following additional criteria: you did not own a home in the previous two-years, and only $10,0000 of the retirement distribution qualifies to avoid the tax penalty.

** You do not need to itemize in order to claim the medical expense exception.

Answer 4

i would ask you to check with a financial consultant, also when you withdraw money from your 401K it will be taxed. So best is to discuss with him and find out whats your option

Answer 5

You will definately have to pay taxes. It depends on the company she works for, she needs to ask if she can take money out for a hardship withdrawl.

Answer 6

sometimes you can take a "hardship" withdrawal but I don't know what the penalities are - I would check with a financial advisor.

Answer 7

No, you pay penalties if you are younger than 59.5.