The company I work for just terminated their 401(k) plan and suggested employees roll their funds over to an IRA. My question is can I cash out say 20% (to pay off debt) of my balance without paying the penalty and roll the remainder over to the IRA account?
I have over a couple hundred thousand dollars in the 401(k) and would save over $600 a month in debt!
First, I want to caution you against this strategy. If you take money out now, you will have less money for retirement. If you can afford to pay off your debt without tapping into your retirement, that is the best strategy to pursue. There are several strategies to help you pay down you debt faster, e.g.,
- Earn more money and spend less, and put the difference toward your debt payment
- Do a cash-out refinance your house (if you have one and able to)
- Take out a lower interest rate debt to pay your current ones, e.g., 0% APR balance transfer, or borrow money from peer-to-peer lending networks.
That said, there are a few ways to get money out from your 401(k) without paying a penalty — you still have to pay taxes and your current rates though.
59 ½ or Older
The minimum age for taking cash out of your 401(k) plan without having to pay the early withdrawal penalty is 59 ½. If you are over that age, then you can take your money out and just pay your standard income taxes.
There are also several exceptions where you avoid paying the penalty (but you still have to pay income taxes). These include:
- You die (but that’s not the case here)
- You suffered from a qualifying disablity
- You need money to pay for medical expenses
- You are 55 or older and left your job
You can see more in depth explanation of the bullet points above heree: 6 Ways to Claim Your 401k Early and Penalty Free.
Substantially Equal Periodic Payments with Rule 72(t)
Last but not least, there is a rather complex rule that allows you to take substantially equal periodic payments for at least 5 years, or until you reach age 59½, whichever comes later. Once you’ve been taking the payments for 5 years and you’ve reached age 59½, you can discontinue the payments if you so desire. You can read more about it here: 72(t) Distribution Rules.
Obviously, this won’t work for you because it doesn’t allow you to take out enough money for what you want to do, but I included it here for the sake of completeness.
I hope this helps.
Please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a financial expert as needed.