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You need that money in your 401K account but are worried about losing half if you try to take it out. How much will you really lose, how much in penalties will you pay? Maybe less than you think.

Just what is a 401K?

In non-technical language, a 401K is a plan that allows you to save money for your retirement by taking an amount of you paycheck (a contribution) and having money taken out BEFORE you pay takes on it. The taxes on that money is deferred until withdrawal.

So when do I get my hands on this money?

Have your been contributing to your 401K for many years? Have you been watching it grow? Are you wondering when can I take the money out of my 401K? Well the answer to that is "it depends". It actually depends on a number of things.

What exactly are the requirements to get my money out?

There are federal laws that control how a person may receive distributions of money from their 401K. These may differ very slightly from state to state but basically they are the same. You must be at least 59.5 years old or you retire, become disabled or die. If you experience a financial hardship (certain rules apply) or if your 401K plan is terminated for some reason. You can take money out if you do not meet these requirements but you would be subject to penalties (fines). If you meet the above requirements, you would have to pay taxes but no penalty fees.

So what penalties will I face if I take the money out sooner?

The first penalty besides being liable to pay all the taxes you will owe on the money is a 10% penalty. Therefore, if the 401K were for $250,000 you would lose $25,000.

When wouldn't I have to pay a penalty?

You could take money out of your 401K without paying a penalty if you are over age 55 and retired (or left) you job. If you had medical bills that were more than 7.5% of your adjusted income. If the distribution of a 401K were required due to a court ruling during a divorce decree (qualified domestic relations court order) there would be no penalties. There is a home buy exception to the rule. If you have not owned a home in the past two years and you need the money that is in your 401K to buy a new house you get a break on the penalties. Only the first $10,000 of the 401k qualifies to be taxed.