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By timestaff
May 29, 2014

Typically you need to keep the money in the plan until you reach age 59 ½. Withdraw any of it before then and you’ll be hit with a bruising 10% early withdrawal penalty, on top of the regular income tax that is due on withdrawals. Bad idea.

There are exceptions, however. The IRS waives the 10% penalty for certain “hardship” withdrawals. Each plan’s rules vary (check yours to be sure), but you may be able take money out of your retirement account penalty-free before age 59 ½ if you use it for:

  • Purchasing your first home
  • Expenses after the onset of a sudden disability
  • Higher education expenses (like college for your kids)
  • Payments you make to prevent eviction or foreclosure.

You should consider all these last ditch options, though. After all, the money is locked up until retirement for a very good reason: If you spend it now, you risk jeopardizing your financial security when you’re older.

If you can’t get the money anywhere else, your best option is probably a loan. Many 401(k) plans allow you to borrow against the amount in your account. You must repay the money to your account within a set period – usually a few years – or the loan is treated as a withdrawal, meaning you’ll owe taxes and a 10% penalty on it.

There are three main drawbacks to taking out a loan. First, you reduce the money you have growing for your retirement years. Second, you have to pay interest on the amount you borrow — typically the prime rate plus one percentage point — though you do pay the interest to yourself. Third, you must repay any outstanding loan within a few months if you are laid off or decide to change jobs.

Advertiser Disclosure

The purpose of this disclosure is to explain how we make money without charging you for our content.

Our mission is to help people at any stage of life make smart financial decisions through research, reporting, reviews, recommendations, and tools.

Earning your trust is essential to our success, and we believe transparency is critical to creating that trust. To that end, you should know that many or all of the companies featured here are partners who advertise with us.

Our content is free because our partners pay us a referral fee if you click on links or call any of the phone numbers on our site. If you choose to interact with the content on our site, we will likely receive compensation. If you don't, we will not be compensated. Ultimately the choice is yours.

Opinions are our own and our editors and staff writers are instructed to maintain editorial integrity, but compensation along with in-depth research will determine where, how, and in what order they appear on the page.

To find out more about our editorial process and how we make money, click here.

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