Suze Orman Explains the Important Rules Around 401(k) Early Withdrawals
Written by
Nicole Spector
Edited by
Gary Dudak
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When it comes to retirement plans, a 401(k) can be tricky, in part because so many rules apply to it. For example, you need to know about contribution limits and understand how vesting works when you have a 401(k). If you plan on withdrawing money from your 401(k) — before you bid adieu to working life — you’re could be slammed with a penalty fee.
But what are the exact rules around early withdrawals? Can you pull one off without a penalty? Financial guru Suze Orman took to her blog to explain the rules around 401(k) early withdrawals (which, for the record, she strongly advises against). Here they are below, and you can also check out her 401(k) advice for those who quit their jobs.
Prepare for a 10% Penalty Fee If Under 59 ½ Years Old
Orman tells it like it is when she says that making an early withdrawal from a retirement account is typically a costly decision. How so?
“The government tacks on a 10% penalty for early withdrawals made from traditional IRAs and 401(k)s before the account owner is age 59½,” Orman wrote. “That’s in addition to the income tax due on withdrawals from traditional retirement accounts.”
You Can Take Out $1,000 Per Year
That said, new rules stipulate that you can make early 401(k) plan withdrawals up to $1,000 a year and, no matter your age, you will not owe a 10% early withdrawal penalty fee
So that’s good news, but $1,000 a year may not be enough for some people. And there are still other consequences for and early withdrawal from a 401(k).
You Will Owe Income Tax — Even on an Emergency Withdrawal
Any amount you take out from a traditional retirement account, including a 401(k), you will owe income tax on — even if you’re withdrawing the funds for an emergency. Yet there is one recent change that Orman highlighted.
“The only change is that the new regulation waives the 10% penalty fee for a qualifying early withdrawal,” Orman wrote.
It’s not too hard to qualify, either. All you need to do is submit a written notice that the withdrawal is for an emergency. “The IRS has just clarified that it has a very broad definition of what qualifies as an emergency,” she added.
You Have To Replenish Your 401(k) Within 3 Years
You can take out up to $1,000 early for emergency expenses from your 401(k) without a fee, but you need to pay it all back within three years. If you don’t, you will not be allowed to make annual $1,000 or more withdrawals without being slammed with a penalty charge in the future.
Your 401(k) Balance Must Stay Above $1,000
“The balance must remain above $1,000,” Orman wrote. “Your $1,000 annual limit assumes you will still have at least $1,000 remaining in the retirement account.”
So, yes, you can make early withdrawals from your 401(k). But will those withdrawals be worth it? Only if you follow the rules and understand the consequences if you don’t replenish your 401(k) in a timely manner.
Withdraw Early Only in an Emergency
Orman and many other financial experts advise against early withdrawal from a 401(k), but if you’re really in dire straits, you can safely do it. Just follow the rules.
“If you do find yourself in a financial bind, you may be able to borrow money from your own retirement account, without a costly 10% early withdrawal penalty,” Orman wrote.
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