Can I contribute to my 401(k) after taking withdrawals?

Most plans that allow “in-service” withdrawals for participants age 59½ and older do allow continued contributions. But consider other options too.

If you’ve been told that you can withdraw from your 401(k) plan without penalty while still employed, then it sounds like your plan has a provision allowing participants to take “in-service” withdrawals. Most plans that allow in-service withdrawals for participants age 59½ and older also allow for continued contributions, so you should be able to keep making contributions to your plan.

But taking an in-service withdrawal does have drawbacks:

1 – You must pay taxes on the withdrawal, which will take a significant chunk out of the money you withdraw.
2 – You could lose out on potential tax-deferred growth during the time your 401(k) is depleted of those funds.

Consider your options
If you need the money right now—for example, you have a temporary emergency and no other options—you might want to consider these alternatives to withdrawing money from your 401(k).

1 – Rather than an in-service withdrawal, you’re probably better off taking a 401(k) loan. You would have to pay this back with after-tax dollars, but that would be preferable to a taxable withdrawal. In any case, hopefully you’ll be able to resume making contributions quickly.
2 – Keep in mind that in-service withdrawals typically allow for direct custodian-to-custodian rollovers of any amount from your 401(k) to your IRA. This might come in handy if you feel your own IRA would give you better investment choices than are currently available in your 401(k).

Before you make any decisions, be sure to check with your plan administrator because rules can vary among employers.

Next steps

1 – Talk to your 401(k) administrator and find out the rules for your plan.
2 – Compare the advantages and disadvantages of an in-service withdrawal versus a 401(k) loan.
3 – If you’re looking to roll over your 401(k) into an IRA, talk to an IRA specialist.
4 – Educate yourself on implications of withdrawing money from your savings

Source: http://www.schwab.com/public/schwab/planning/retirement/nearing/real_questions/withdrawing_retirement_money/can_i_contribute_to_401k_after_withdrawals.html

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