by Marcy Kennedy

Created on: January 16, 2009

WITHDRAWING FROM A 401(K) PLAN

Your 401(k) plan is a retirement savings plan sponsored by your company or employer and administered by a financial institution. Most people invest in a 401(k) plan intending to leave the money there until they retire, but circumstances may arise that make withdrawing money from a 401(k) plan before retirement tempting.

The government, however, has certain laws in place that determine when or if you may withdraw your money. Other than reaching the retirement age of 65, you may only remove your money in one of the following situations.

401(K) PLAN LOAN

If an unexpected crisis hits, a plan loan may be your best option for withdrawing from a 401(k) plan. You can take out up to 50 percent or $50,000 of your fully vested 401(k) balance. (For an overview of what "vesting" means, visit "How Does a 401(k) Plan Work" at http://www.helium.com/items/1298264-how-does-a-401k- plan-work

A 401(k) plan loan has certain advantages over a conventional loan. You don't have to fill out a long credit application, and you receive your money usually within a week of applying. Moreover, the interest you pay will be prime plus 1 percent, which is much lower than what you would be able to get on a conventional loan.

Payments on this loan are drawn directly from your paycheck. In most cases, you have five years to repay what you've withdrawn. If you withdrew the money to make a down payment on a home, you have ten years.

A 401(k) plan loan is not without risk. If you default on your loan by failing to repay it within the given amount of time, your loan will be treated as an early withdrawal. You will be charged 20 percent or more in taxes and a 10 percent early withdrawal penalty. If you've already used the money you withdrew, you will need to find another way to pay these charges.

If you leave your current employment (whether you are fired or take a new job) while your loan is outstanding, you have 60 days to repay your loan in full. If you fail to do so, your loan will again be treated as an early withdrawal and you will be charged the associated taxes and penalties.

For a more detailed explanation of the pros and cons of a 401(k) plan loan, visit "Borrowing From a 401(k) Plan" at http://www.helium.com/items/1298145-borrowing-from-a -401k-plan.

401(K) HARDSHIP WITHDRAWAL

A 401(k) hardship withdrawal is the only other way that you can withdraw money from your 401(k) plan while you are still employed and have not yet reached retirement age. Each 401(k) plan specifies

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