Although the purpose of tax-advantaged retirement accounts such as a 401(k) is to help people stash their savings for use after retirement, many have contemplated withdrawing money before the permitted age.
However, the US government does not allow US citizens to withdraw money for free, imposing a 10 percent penalty on withdrawals before reaching the age of 59 and a half.
Hardships, higher education expenses and buying a first home are some occasions that would see the Internal Revenue Service (IRS) make some exceptions, but being broke is not recognised as hardship.
How to withdraw money from your 401(k) without a penalty
There are ways to withdraw money early without paying a penalty, but this doesn’t mean that you will also avoid paying taxes, as withdrawals are taxed at ordinary income rates.
There are a few ways to avoid the penalty, as US citizens can withdraw money early to spend on unreimbursed deductible medical expenses that exceed 10 percent of adjusted gross income.
Permanently disabled people can also withdraw money without paying a penalty, while unemployed people can spend money from their 401(k) account on health insurance premiums. It should be noted that, to be able to do so, they must be unemployed for at least 12 weeks.
Meanwhile, when an account holder passes away, the beneficiaries can freely withdraw money from the account without the US government imposing a 10 percent penalty on them.
The IRS will also allow you to get a penalty-free withdrawal in the event you owe them unpaid taxes, while first-time homebuyers can also withdraw money from the account without paying a penalty.
Despite there being a limit of 10.000 dollars, the interested party can make as many withdrawals as they wish. Having not owned a home in the previous two years is one of the main requirements in this case.