How to Make 401(k) Strategies Work For You, When You Need Them

How to Make 401(k) Strategies Work For You

Did you know between March 2020 and January 2021, 1.6 million Americans withdrew from their 401(k)?

Although withdrawing from your retirement plan might seem daunting, there are ways to do it safely. If you’re in financial hardship and are considering borrowing from your retirement plan safely and without penalties, we’re here to help.

Read on to learn about these 401(k) strategies.

What is a 401(k) Plan?

money coins saving set increase for concept investment fund finance and mortgage loan - Prudent Financial SolutionsA 401(k) is a retirement contribution plan offered by employers for employees. These employer-sponsored retirement plans allow employees to contribute a portion of their checks for retirement. 

These retirement plans also offer employees a tax-friendly way to save for retirement. 

Most 401(k) plans consist of two basic types, traditional 401(k) or Roth 401(k). If you choose a traditional 401(k), you will be expected to make contributions pre-tax. Whereas with a Roth 401(k), you will make contributions post-tax.

When Are You Allowed to Borrow Penalty-Free from Your Retirement Plan?

If you decide it’s worth withdrawing from your 401(k) account, you should learn the ways you can borrow penalty-free. Otherwise, you will face a hefty fee of 10% if you withdraw your funds before reaching the age of 59 and a half

COVID-19-Related Withdrawals

Thanks to the economic hardships caused by COVID-19, the CARES Act provided Americans in hardship to withdrawal from their 401(k) plans penalty-free. 

The relief act allows contributors to borrow from their retirement plans to cover COVID-19 related expenses. The plan also requires that borrowers repay the tax over the next three years and contribute to the funds.

Education Purposes

Tuition payment or tuition fee or expense for graduate study abroad program - Prudent Financial SolutionsIf you want to go back to school and get an advanced degree, you can withdraw from your 401(k) to make it happen.

You’re allowed to borrow money from your retirement plan to pay for tuition, books, equipment, and other fees. 

Although you won’t have to pay the penalty for withdrawing before your retirement age, the funds will count towards your taxable income. You’re also allowed to withdraw funds to pay for the education of your spouse and qualifying dependents. 

Putting a Downpayment On a Home

Coming up with a 20% downpayment to purchase a home is a serious undertaking. 

However, you can borrow up to $10,000 from your retirement plan if you’re a first-time homebuyer. If you have a spouse included in your retirement plan, they will also qualify for this benefit. 

Keep in mind that the phrase “first-time homebuyers” refers to those that haven’t taken a homeownership credit in the past two years.

Cover Unexpected Medical Expenses

Although the CARES-Act covers expenses caused by Coronavirus, such as medical expenses, you can always get money from your 401(k) to cover other medical expenses. 

You are allowed to withdraw from your retirement plan if your medical expenses exceed 10% of your AIG. 

Now You’re Aware of These 401(K) Strategies

Now that you know about these 401(k) strategies, you can decide which strategy will work for you.

Remember, you can borrow from your 401(K) to cover medical expenses, education, buying a home, or if you qualify for the CARES-Act.

Do you think a 401(k) loan is right for you? Contact us today to learn more.

April 22, 2021
Piggybank with 401k written on a blackboard - Prudent Financial Solutions

How to Make 401(k) Strategies Work For You

Did you know between March 2020 and January 2021, 1.6 million Americans withdrew from their 401(k)? Although withdrawing from your retirement plan might seem daunting, there […]