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401k Early Withdrawal Rules
By plrprousers | February 28, 2009
A 401k plan is one of the best options for saving for your retirement. An account is created that allows you to save pre-tax dollars and invest in numerous stock, money market and bond investment opportunities. Many times the employer will match your contribution giving you, in essence, free money for you to invest as well. But in these economic times many people want to remove their 401k savings to pay bills and debt. Is this a good idea?
If you choose a 401k withdrawal and are not over the age of 59 1/2 you are going to be taxed heavily. The funds from your 401k will be taxed by your company as ordinary income and provided to the IRS. A 10% penalty will also be assessed, which is not immediately taken out of your proceeds like a tax, but it due to the IRS nonetheless. You will be giving up a lot of retirement money back to the IRS. An 401k early withdrawal should be the very last resort if you are in need of money.
The IRS has essentially fives reasons that they deem valid for qualifying for a 401k early withdrawal. They are:
- Large medical bills for you or your family.
- To prevent the foreclosure of your home.
- Cost related to purchasing a primary residence.
- Expenses for burial of parents, your spouse, children or any other dependent.
- Post secondary education costs for you, your spouse or children.
Even for a a hardship withdrawal you may still be taxed and penalized for the money you need. You will be required to exhaust all possible means of financing or loans before the 401k plan can be utilized for funds. And there are limits to how much you will be able to withdraw under the law.
Even if you leave your company and are given a lump-sum distribution, the money can be taxed if it is not rolled over into another qualifying plan like an IRA. That would be a good time to learn beginner stock market investing. The IRS clearly insists that the intent of the 401k plan was for it to be used for retirement, or at least when you reach the age of 59 1/2.
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Thanks for all the information. I read a very interesting post about this concept. Its about 401k withdrawal rules. Very interesting!!!
401k withdrawal ruless last blog post..What the financial gurus think they know about Bank On Yourself that just ain’t so