One of the biggest critiques is that a 401k account is like “money jail.” The advice that usually follows this critique is that doctors should not maximize or even invest in a 401k. This is a huge mistake and usually very biased advice from someone selling you an investment opportunity and who wants your money to be with them instead of your 401k. However, if a 401k really is money jail, then it is the easiest jail ever to escape from. Here I am going to share over 10 ways that doctors can access their 401k investments early if they ever needed to with the goal of alleviating these concerns and standing up for our 401k as an important tool in a doctor's road to financial freedom.

First, let's examine why some doctors will paint your 401k as a money jail…

Because the money jail crowd does have some seemingly valid points.

• Money invested in a 401k account cannot be accessed until a certain age without a stiff 10% penalty
• Investing in a 401k account limits you to only the investments available by the 401k administrator
• Money in a 401k account is tax deferred, which is maybe the least favorable of the advantaged tax treatments since taxes are likely to rise, not fall in the future

I can't argue with any of these points. 

Your 401k investments are held in check by an age limit of 59.5 years on their withdrawal and limit investing options. Like the gates and guards of a financial prison.

In the meantime, investing outside of a 401k gives you the freedom to invest your money as you see fit and use the cash flow or realized gains right away, all with potential tax advantages. 

So, is your 401k really a money jail? The simple answer is no

For many reasons…and once again, it kind of comes down to the rational and irrational sides of personal finance. Above, I just listed the cold, hard facts. And if that was all that existed, this might be a more open and shut case.

But rationality does not reign supreme in personal finance. Our financial behaviors are rarely completely rational. Even mine as someone who prides myself on managing these inherent behaviors when it comes to money – like irrational spending.

So, here are the main reasons I do not believe that a 401k or other similar accounts are money jail.

• By design, 401k accounts encourage and foster a buy and hold approach with investments (which, when investing with index funds, is a proven way to reach financial freedom)
• Tax deferred money does actually give you more money to use and invest right now by reducing your immediate taxes
  • It's actually a great strategy for doctors to reduce their tax burden
• Most employers will offer a 401k contribution match – that's free money you miss out on by not using it
• There are still tons of ways that you could get your money out if an emergency or something like that strikes without incurring a major penalty

And keep in mind, while this post is specifically about 401k accounts, Roth IRAs (another alleged money jail) allows for principle to be withdrawn tax and penalty free at any time. This has led some to call it a back-up emergency fund.

So, no. Investing your money in a 401k is not akin to locking it up in Shawshank.

However, some people remain skeptical

Especially in the FIRE crowd. If we plan to retire before age 59.5 and our 401k only lets us withdraw before that age with a 10% penalty (plus federal and state taxes), isn't that a huge disadvantage?

Well, not really. Because there are so many ways that you can access your 401k early that there is almost no coherent argument for not investing in it at all.

10+ Ways Doctors Can Access Their 401k Early

Based on IRS rules, you can withdraw from your 401(k) without incurring the 10% early distribution penalty in the following circumstances:

• You retire, lose your job, or leave to take a new job when you are 55 or older (or 50 if you are a public safety employee). Note that this only applies to the 401(k) from the employer you just left
• A court’s qualified domestic relations order requires that you cash out a 401(k) to split it with your ex-spouse
• You’re a domestic abuse survivor (you can withdraw up to $10,000 or 50% of the account, whichever is less)
• You give birth or adopt a child ($5,000 per child for qualified birth or adoption expenses)
• You have a personal or family emergency, for which you can take an emergency distribution of up to $1,000 in a calendar year
• You are terminally ill
• You are or become disabled
• You rolled over the account to another retirement plan within 60 days (called a 60-day rollover)
• You are deceased and payments were made to your beneficiary or estate after your death
• The money is used to pay an IRS levy
• You have experienced economic loss due to a federally declared disaster
• You are a qualified first-time homebuyer (no more than $10,000)
• You have unreimbursed medical expenses that are greater than 7.5% of your adjusted gross income (AGI)
• You’re a qualified military reservist called to active duty
• You were automatically enrolled in a 401(k) and you want to get out (within specified time limits), or you made corrective distributions for excess contributions

That is a whole lot of ways to get money out of your 401k early

And you are right, many of these are unique circumstances. But they are just the unique circumstances that may happen to people when they may need some unexpected cash. Having an appropriate emergency fund is even further protection against this.

3 more holes that anyone can use to access your 401k early

But let's say you are still not convinced and want to make sure you can access the hard earned money in your 401k whenever you want. Well, thankfully, there are still 3 more broad and versatile options available.

1. Hardship withdrawals

The IRS allows for hardship distributions for “immediate and heavy financial need(s).” The distribution can only be for the amount required to satisfy that particular financial need, and it must be in compliance with your 401(k) plan terms.

Here are some of the things that can qualify as an immediate and heavy financial need:

• Medical bills for you, your spouse, or your dependents
• Costs directly related to the purchase of your home (excluding mortgage payments)
• College tuition, related fees, and room and board for the next 12 months for you, your spouse, or your dependents
• Money to avoid eviction or foreclosure on your primary residence
• Funeral expenses for you, your spouse, or your children or dependents
• Certain expenses to repair damage to your home

To qualify for a hardship withdrawal, you have to prove to your plan administrator that you cannot obtain the needed funds from another source. And importantly note that the distributions are subject to income tax (same as any withdrawal from your 401k) and they cannot be repaid into the plan or rolled over into another plan or IRA.

So, if you are in just about any tight spot, you can access your 401k early. But what if you just want the money for whatever you want to spend it on, not necessarily because you have a hardship?

That's where the next two options come in…

2. 401k loans

Imagine an extreme scenario. You come across a once in a lifetime investment opportunity. Let's say it's a real estate investment. Or anything else that you cannot invest in through your 401k. And you want to participate in this investment really badly. But you rue your 401k for limiting your investment options.

Well, you actually could still invest in this opportunity. Just take out a loan on your 401k and use that money to invest.

401k loans carry the following features:

• You can borrow up to 50% of your 401(k) balance, or $50,000, whichever is lower
• You have to generally repay the loans within five years, plus interest
• Unlike a 401(k) withdrawal, loans don't incur taxes or penalties, and repayments (including interest) go back into your account
• If you leave your job, the loan may be due in full in a short time frame

Now, let's get something straight. I absolutely do not condone that you use a 401k loan to invest in some “once in a lifetime opportunity.” But this is the argument that most people offering such opportunities will make against a 401k. (Plus most investments that are too good to be true are just that.)

However, if you are in need of a lump sum amount, a 401k loan is an option for early access. And, we once again demonstrate that calling 401k money jail is a straw man argument.

But what if you don't need a lump sum? And instead, you just want to start taking withdrawals to fund your monthly expenses in early retirement or retirement lite? There is an option for that too…

3. Substantially Equal Periodic Payment (SEPP) plans

Substantially Equal Periodic Payment (SEPP) plans allow penalty-free early withdrawals from retirement accounts including a 401k, following specific IRS guidelines in accordance with IRS Rule 72(t).

So, basically, SEPP allows you to start drawing down your 401k nest egg early.

There are some important notes though. SEPP plans do require consistent withdrawals for at least 5 years or until age 59½, whichever is longer, using one of three approved IRS calculation methods. Plus, early termination of a SEPP plan can result in significant penalties, including repayment of waived penalties with interest. You also cannot contribute more to the 401k plan once you start SEPPs.

So there goes the argument that 401ks don't mix well with FIRE.

Why pretty much all doctors should invest in their 401k accounts

Investing in a 401k carries massive advantages. The main disadvantage is that the withdrawal age without penalty is 59.5. But is that really true? While technically the answer is yes, hopefully this post has shown that your 401k money is pretty much always available to you in some way, shape, or form.

But even more, doctors are in a privileged position when it comes to thinking about a 401k. As a general rule of thumb, everyone should be saving at least 20% of their pre-tax income and using it to build wealth. But doctors are high-income earners. When we save 20% of our pre tax income (regardless of specialty), we will have plenty of money to invest in our 401k and then invest in any other way we see fit. It's really not an either/or decision. It's just that it often gets artificially painted that way. Another reason our financial education as doctors is so important. Make sure you use all available tools to create your path to financial freedom!

What do you think? Is your 401k money jail? Did you know about all of these ways to access your 401k early? Do they seem reasonable? Let me know in the comments below!