How To Withdraw Money Before Your Retirement

How to Withdraw Money Before Your Retirement

During times of uncertainty, people might need emergency cash, and their retirement plan is their only source of funds. However, sometimes people are not sure whether or not they can withdraw money before their retirement age.

Can you take money from your retirement right now?

The recently passed CARES Act by 116th U.S Congress makes it easier for you to borrow money from your 401(k) plan. The previous loan limit was $50,000. But this new CARES Act allows you to borrow up to $100,000. You can delay repayment for almost one year. After you borrow, you’ll have to repay the loan within five years, depending on the terms of your 401(k) plan. However, if you are not able to pay back the loan within the time limit designated by your plan, your outstanding balance will be taxed like a withdrawal, and you’ll also have to pay a 10% early withdrawal penalty.

Early withdrawal penalty

You won’t have to pay the 10% early withdrawal penalty if you’re under age 59 ½. Here is the important point to note that if you leave your job — whether by choice or not, then there’s a chance that your plan will require you to repay the money back very quickly. If you are not able to repay the money, then the account balance will be reduced by the amount owed and considered a distribution. And unless you are able to come up with that amount and put it in a qualifying retirement account, that distribution is taxable.  

The age at which you can take withdrawals without penalty and tax treatment of withdrawals vary between different types of plans as well:

1. 401(k) plan

In the 401(k) plan you have to pay a 10% penalty, if you withdraw funds from your plan before age 59½. But if your age is 59½ or more then you don’t have to pay a 10% penalty.

2. (IRAs)  

Individual Retirement Accounts are a tax-favored investment account. You can use this account to invest in stocks, Bonds, Mutual funds, ETFs, and other types of investments after putting money into it. You can sell and buy investments within the IRAs. If you take money out of it before the age of 59½, then just like the 401(k) plan, you have to pay a 10% penalty fee.

3. Roth IRAs

Any money generated within Roth IRAs is never taxed again but in this plan. You are not required to begin taking withdrawals at age 70½  which you can do with both 401(k) and (IRAs). In Roth IRAs, you can take withdrawal contributions you have made before your retirement age without penalty. But there is one condition that before taking withdrawal contributions. At least 5 years must have passed since the date of the first contribution.

In short, taking money from your retirement plan is like you’ll be paying yourself back instead of paying 11% interest On average on a personal loan.