Do you know if your 401(K) is “leaking”? If it is, then this is what you can do.
If you’re one of those people who takes early scoops here and there your 401(k) account, you’re hurting yourself. For example, a February 2015 study indicates that such early dips cut into your retirement money by as much as 25 percent. The first step to stop that from happening is to understand hardship withdrawals, cashouts when leaving a job, and loans.
If you show serious financial need such as medical care, staying in your home or paying for higher education, you stand to qualify for a hardship withdrawal. You’re hit with a 10 percent penalty as well as 20 percent income-tax withholding. In addition, you can’t make new contributions for a minimum of six months. Avoid all of those expenses by setting up an emergency fund for unexpected expenses. Aim to save at least three months of your regular monthly income in the fund.
If you change jobs, you can receive a lump-sum distribution from your 401(k). There are two possible solutions to the withdrawal fee and withholding tax. The first is to roll over the balance to a new account or a new 401(k) plan sponsored by your new employer. The second solution is to simply leave your money where it is; you have this option as long as your account balance is more than $5,000.
Loans are the best way to withdraw 401(k) money if you must. You have to repay the amounts with interest, and the loans are not taxable. However, if you leave your job, you must immediately repay the loan. If you default, you’re hit with penalties, taxes and other fees. Avoid such scenarios by building up emergency funds, saving for expenses rather than taking out loans, and if you take out loans, taking them out for the lowest amount you need.
Of course, even if your 401(K) does take a hit, there are ways to build it back up again.