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Published: Aug 18, 2017 7 min read
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Being able to contribute money to build your savings through your employer is a great perk — but unfortunately, only 14 percent of employers offer such plans, according to Bloomberg. If you’re one of the lucky employees who can participate in an employer-sponsored plan, you need to know 401(k) basics including when you can make withdrawals.

Review these 10 lessons about how to make savvy withdrawals from your 401(k). Being knowledgeable about 401(k) withdrawal rules will help you maximize your employer-sponsored nest egg.

1. You Can’t Access Your 401(k) Money at Will

Unlike an IRA withdrawal, you can’t make a 401(k) withdrawal whenever you want. Instead, you must meet the requirements to qualify for a distribution. Eligible situations include leaving your job, suffering a permanent disability or turning 59.5. Your plan might allow for a 401(k) hardship withdrawal or 401k loan, but those allowances are at the discretion of your employer.

2. Employers Set Vesting Schedules

If your employer makes contributions to your 401(k) plan on your behalf, it can determine when that money belongs to you 100 percent. Companies can meet one of two vesting schedules:

  • You must be 100 percent vested by the end of your third year of employment.
  • You must be at least 20 percent vested after the end of your second year and gain an additional 20 percent each year until you are fully vested after the sixth year.

If you leave before you are fully vested, your unvested employer contributions won’t be yours to keep. But any contribution you make is always fully vested.

3. Learn the Hardship Distribution Rules

Your 401k plan likely includes rules for making a hardship withdrawal and each plan specifies what qualifies as one. For example, a plan might allow hardship distributions for medical and funeral expenses but not for education expenses. Keep in mind that because an expense qualifies for a hardship distribution it doesn’t mean you’ll avoid a 10 percent early withdrawal penalty.

4. Early Withdrawals Come With Penalties

If you take a distribution — including a hardship withdrawal — prior to the 401k distribution age of 59.5, you’ll owe an extra 10 percent penalty on top of the taxes you’ll pay unless an exception applies. For example, if you take out $10,000 as a hardship distribution to pay for a funeral, you might owe income taxes on the $10,000 plus an extra $1,000 penalty depending on your 401(k) plan. Be very careful about withdrawals, particularly if you want to retire early.

5. Penalty Exceptions Exist

Once you hit age 59.5 you can take a penalty-free 401k withdrawal for any reason — you can also take one if you suffer a permanent disability or leave your job after you turn 55, or 50 if you are a qualified public safety employee. You can withdraw penalty free if you have medical expenses in excess of 10 percent of your adjusted gross income, which goes down to 7.5 percent if you’re over 65. And last, if you inherited your 401k, you can withdraw without paying a penalty.

6. A 401(k) Loan Might Work for You

If you don’t want to pay an early withdrawal penalty, consider a 401(k) loan — assuming your plan permits them. You can borrow as much as the greater of $10,000 or half of your vested account balance, or $50,000, whichever is smaller.

You can repay the loan with interest over five years — or longer if you’re borrowing to buy a primary residence. You’ll get the interest added back to your 401(k) plan balance, but you’ll miss out on any market gains — or losses — while the money is on loan to you.

7. 401(k) Loans Have Tax Consequences

As long as you repay the 401(k) loan on time, you won’t owe any taxes or penalties. However, if you default on your repayments, the IRS treats the outstanding loan balance as a permanent distribution, which means you’ll owe taxes and — unless you’re over age 59.5 — an extra, 10 percent tax penalty. You might want to consider other options — like a personal loan — prior to tapping your 401(k).

8. You’ll Be Taxed on Distributions

For traditional 401(k) plans, you’re required to include the amounts you withdraw in your taxable income because it wasn’t taxed when you contributed it. For Roth 401(k) plans, your qualified distributions come out entirely tax-free. To take a qualified distribution from a Roth IRA, you must have the account open for five years and be either 59.5 years old or permanently disabled.

9. You Have Rollover Options

If you leave your job you don’t have to empty your 401(k) and pay the taxes and penalties that would come with a distribution. Instead, you can roll over your old 401(k) into a 401(k) at your new job or open a traditional IRA on your own. You can also convert it to a Roth IRA; you’ll owe taxes on the amount you convert but won’t have to pay any penalties.

10. Your 401(k) Requires Withdrawals

You can’t leave the money in your 401(k) plan forever. Once you turn 70.5, you must start taking a portion of the money out each year. If you don’t, the IRS imposes a 50 percent penalty on the amount you fail to withdraw. As long as you don’t own 5 percent or more of the company you’re investing through, you can delay taking mandatory 401(k) withdrawals until you retire.

The tax advantages of a 401(k) plan and employer contributions make it a no-brainer to participate in one if your employer offers it. Although there are substantial pitfalls that can take a bite out of your 401(k) savings, knowing the rules can help you avoid losing your money, take advantage of tax breaks and save wisely for your retirement.

This story originally appeared on GOBankingRates.