Due to the coronavirus pandemic, many Americans have lost their jobs and the unemployment rate has increased drastically. Amidst this crisis, 27% of Americans have considered withdrawing money from their 401(k) retirement accounts.
However, this is not advisable and should only be done when there is no other option left as there are huge financial penalties for withdrawing your money early. Moreover, you will also have to give up the advantages of tax-deferred earnings as well as compounding interest. The following are a few instances when it is acceptable to use your 401(k) account.
You can withdraw around $100,000 under CARES Act and you will not be liable for the 10% early withdrawal penalty, but you will have to pay income tax. This act will no longer be applicable by the end of 2020 and Congress is in a deadlock on the decision of extending it.
You are also allowed to withdraw from your 401(k) accounts if you have medical expenses that are paid out of pocket. However, these have to be more than 10% of your adjusted gross income or it will not be penalty-free.
If you are going through a divorce, you will have to withdraw money from your retirement account because you will most likely be required by the court to do so. You are not liable to pay a penalty because distributions are not included in the penalty if you are the account owner.
You can also use your retirement account money to fund your business. The process is, however, complicated and if proper legal steps are not taken, it may be considered a questionable transaction.
You can also buy your first house using the 401(k) funds and the rule states that it applies to everyone who has not bought a house in the past two years. Thus, this benefit will be available to you multiple times.
Colleges don’t take into account 401(k) funds when they are determining who qualifies for financial aid hence it is advisable to invest more in your retirement account. You are liable to the 10% penalty if you withdraw from your 401(k) account; however, you are exempt if money for higher education is taken from your IRA.
You can also withdraw from the retirement fund if you are facing foreclosure. However, you might still have to pay the penalty.