Cashing out Non-Pre Tax dolars from a 401K

[Lonewolf]

Taking the argument out that you should never take money out of a 401K, a friend of mine is looking for what the options are. He is 30 years old and has about 160K in his 401K. He was putting in 22% a year and so for a few years he would max out at 15,500 pre-tax dollars and so would accumulate some non-pre tax dollars in his 401K. He has about 5 to 10K in non-pre tax dollars and was wondering if he could remove this without being penalized. Does anyone know what the rules around this are?

[Vytautas]

Both a traditional and Roth 401k have a 10% withdrawal penalty if you withdraw any before age 59 1/2. There are a few ways to get around the penalty such as disability, taking a loan against the account, medical expenses and whatnot.

If your friend wants to withdraw the funds for some kind of personal non-essential reason it can be very difficult to avoid the penalty.

[irmanator]

I thought you could take out the not pre-tax dollars cause the penalty was because it was non taxed.

[safari]

If he made excess deferrals to 401K, he should have taken the excess money back as a distribution by April 15 the following year. Since he hasn't done that, he's going to pay taxes again on the same money. Check out this article.

[Vytautas]

Can you be more specific on what you mean by "non-pre tax dollars"? I can't understand whether you are referring to a type of 401k account (Roth which taxes before contributions or traditional which defers taxes) or deposits that surpassed the $16,500 contributions limit.

[irmanator]

wow i didn't know that. Like the article said it's not like too many people have that problem.

[kanjoh]

There are severe tax penalties associated with this. I recommend instead trying to take out a loan. It will be cheaper in the long run, you won't incur tax penalties, and your savings can continue to accumulate tax-free.

Ideally, you shouldn't borrow money for personal consumption at all. If you need a loan for education or investment (home, car etc), you can often get financing at good rates if you have a solid credit history. Also look to friends and family to get a loan, or try to reduce personal consumption.