Penalty-Free Ways
to Tap Your 401(k)
The Short Answer
I’m 56 and out of work.
Can I withdraw money from
my 401(k) account without
being penalized?
That depends on your age when you left your job. If your last day at work was during or after the year you turned 55, you can take the money without incurring a 10 percent early- withdrawal penalty. If your employ- ment ended earlier, the penalty may be waived if you’re totally disabled or
had big medical expenses.
FAC TS SOURCE: THE INSTI TU TE FOR COLLEGE ACCESS AND SUCCESS
$100,000 saved, you could draw as
much as $26,756 over five years.
Another way around a penalty is
to take a series of 72(t) distributions.
This option can be used with a 401(k)
or an IRA. Basically, you must agree
to receive a series of annual distribu-
tions from your account for at least
five years or until you turn 591/2,
whichever takes longer. But you don’t
get to pick your amount. The distri-
bution is based on life-expectancy
tables from the IRS, and the figure
can vary dramatically depending
on which of three methods you
use to compute it. At 56, if you have
The calculations can be complex,
and the agreement you make is a
contract with the IRS, so ask a tax
accountant to do the math for you. If
you withdraw more or less than the
right amount, you’re hit with retro-
active penalties, plus interest.
A 72(t) rarely yields much for
younger people, but in your late 50s
distributions get bigger and you need
to take them for only five years. If your
situation has improved by then, you
can stop taking taxable withdrawals
and let your account continue growing tax-deferred. —Lynn Brenner
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FROM TOP: ILLUSTRATION BY S TEPHEN SAVAGE; VEER; COLLEGE-LOAN-
37%
PORTION WHO
HAVE TAKEN
OU T STUDENT
LOANS
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Lifetime
Warranties—Not!
They sound great, but
watch for these problems.
Buyer Beware
972,000
STUDENTS AGE
50 OR OLDER
PURSUING HIGHER
EDUCATION
$15,600
THEIR AVERAGE
BORROWING FOR
UNDERGRADUATE
STUDY
$32,750
THEIR AVERAGE
BORRO WING FOR
GRADUATE
STUDY
The warranty doesn’t apply
to you. It may cover only the
person who bought the product.
So if you buy a house, the lifetime warranty on the kitchen
faucet may end the minute you
take ownership.
Just replacement parts are
covered. Labor charges may be
extra, along with shipping costs
to send the item back to the
manufacturer for repair.
There’s a time limit. Cisco’s
lifetime warranty on its computer
components, for example, ends
five years after a product is
discontinued. —Caroline E. Mayer
