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When Do I Have to Take Money Out of My 401k?

The difficult economic situation is making people ask the right time when to take money out of 401k. The law itself allows you to make withdrawals early (subject to fees). But as to when, that depends on a number of factors.

Paying off Debts

Some people are tempted to take out some of the money and use it to pay credit debt. However this has its drawbacks. You not only have to pay a fee, but since that fund is intended for your retirement, it will affect your future plans as well. A better idea is to momentarily stop making contributions.

Use the money to instead pay off your debt. After paying it off, you can resume making your contributions. If you are thinking of when to take money out of 401k, paying for debts isn’t the time.

You can also try to borrow against the 401k. Depending on your company, you can use this method to pay off debt. In addition, the interest will be returned to the retirement fund.

While withdrawing the money isn’t necessary, paying off those debts now is. When your debt is paid, stay away from those high interest credit cards. This will allow you to resume making contributions to 401k uninterrupted.

Hardship Withdrawal

There are other times when you can make withdrawals with low or no fees. This is called the hardship withdrawal and are among the right times when to take money out of 401k.

Among the reasons are paying for college tuition, facing eviction or death of the plan investor. It’s also allowed to cover medical expenses. This is provided that the costs are over 7.5% of your income.

It’s important that you have all the proper documents with you before attempting to make a withdrawal. The withdrawal must also be not more than what you’ll have to pay for.

Making an Investment

Some people consider taking some of the money to invest in the stock market, real estate etc. While you can certainly make more money in these markets, you could also lose a lot. Never forget what the fund is: it is for your retirement.

If you are doing well enough now, there’s no reason to use the money. For many, the right time when to take money out of 401k is when retirement age comes.

Nevertheless if you want to use the money to invest, talk with the people who are managing the fund. It’s also a good idea to consult your tax advisor to clarify the matter some more. Knowing in depth where you’ll invest in is of course crucial.

Think Long Term

A lot of the financial turmoil that happens can affect the value of your funds, but it shouldn’t affect you in the long term. Just remember that it will be quite a while before you use that money. So it’s best not to worry too much.

The question of when to take money out of 401k is ultimately up to you. The facts outlined above though, should help you avoid making hasty withdrawals.

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