If you need to take money out of your 401(k) plan before retirement, there are three ways to accomplish that. The first way is to take out a 401(k) loan. But 401(k) loans are not always the best way to borrow money. For example, look at the benefits associated with home equity loans. If you have equity in your home, you can borrow the money, usually at competitive interest rates, and get a tax deduction for the interest paid. Interest paid on a 401(k) loan is generally not tax-deductible. To figure out your best option, calculate the true cost of borrowing in each case.
Second, most 401(k) plans will allow you to take a hardship withdrawal. Make sure you look at all your available options before taking a 401(k) loan or a hardship withdrawal. Finally, if you are over age 59½ or meet other exceptions to the 10% early withdrawal penalty, you can withdraw your 401(k) money without penalty. You will have to pay ordinary income tax on the amounts received. See the section Your 401(k) When Switching Jobs.
IMPORTANT NOTE: We generally recommend that you do not withdraw money from your 401(k). Explore all other alternatives first.
SUGGESTION: Penalty-free withdrawals can be made from an IRA for qualified higher education expenses.
SUGGESTION: A penalty-free withdrawal from an IRA up to a $10,000 lifetime limit can be made for a qualified first-time home purchase.
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