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Government Rules On Borrowing From 401K Or 403B
Each year the pre-tax and after-tax contributions that you make to your 401k or 403b plan is meant to help you have enough money when you retire. However, there might be occasions when you need the money urgently if you are faced with huge medical bills, demise of a spouse or disability. If you withdraw money from your 401k or 403b retirement plan before you reach the age of 59-1/2, you will pay a 10 percent penalty along with the local and federal state taxes. |
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However, the government has rules on borrowing from 401k or 403b retirement plan. You are allowed to withdraw money on certain occasions without incurring the penalty.
- Medical insurance
If you are without a job or lose your job temporarily, you can withdraw money from 401k or 403b without paying a penalty to pay for your medical insurance. In order not to pay penalty, you have to fulfill certain criteria like losing your job, receiving unemployment benefits for at least 12 weeks among others.+
- Buying a home for the first time
If you are buying your home for the first time, you can withdraw up to $10,000 with paying penalty. This money is for down payment and closing costs of the mortgage process. You qualify as a first time home buyer if you have not purchased a new home for at least 2 years. You are allowed to avail this facility just once in your lifetime.
- Unexpected medical bills
In case you do not have a health insurance or are facing unexpected medical bill which not covered by your health insurance, you can withdraw money from your 401k or 403b penalty free. However, the maximum amount you can get is the difference between the medical bill and 7.5 percent of your adjusted gross income (AGI).
- Higher education fees
If you intend taking a university course, you can withdraw money from your 401k or 403b without penalty. The money must be used to cover expenses like fees, tuition, books and supplies. However, only certain universities and colleges are eligible under this rule.
- Mental or physical disability
If you have a mental or physical disability and you are unable to work, you are eligible to withdraw money from your 401k or 403b without penalty. However, this has to be certified by your doctor.
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