What Are The Early Withdrawal Rules For 401k Accounts?

It is important that you proceed with caution if you are considering an early withdrawal from your 401k. By withdrawing from your retirement account, you are sacrificing the benefits of your previous contributions, and exposing yourself to the loss of capital in taxes and fees.

Know The Rules To Withdrawing Your Funds And Save Money

Your contributions to your 401k account are rewarded with tax benefits as your contributions are tax deductible, and your investments grow tax-deferred until you retire. As these funds are designed to be used in retirement, there are penalties for withdrawing funds prior to reaching the age of 59½.

If you will are considering withdrawing from your account, it is important to understand the early withdrawal rules for 401k. By understanding these rules and how they can impact your finances, you can better position yourself to make the decision that is right for your specific situation.

Early Withdrawal Rules For 401k

401k withdrawals are taxes as ordinary income in almost every situation. If you are not at least 59½ at the time of the withdrawal your funds will also be subject to an additional 10% penalty. Your employer is also required to withhold 20% from your withdrawn funds for federal taxes.

If you are withdrawing funds from your 401k, you must remember to factor in taxes and fees when calculating how much money you will be receiving. Always consult with a trained financial expert such as the Chartered Retirement Planning Counselors at online brokerage ETrade to help you decide which strategy is right for you.

The early withdrawal rules for 401k allow for certain exceptions for the 10% penalty. You can make penalty-free withdrawals in certain situations, including if you become unemployed and are at least 55 years of age, you become disabled or pass away. If you pass away with your 401k is still open your beneficiaries will be able to receive penalty-free distributions from your 401k account.

You may also be able to make a penalty-free withdrawal from your 401k if you withdrawal an amount that is less than allowable as a medical expense deduction, or your withdrawal is related to a qualified financial hardship. Be prepared to document and prove any medical or financial hardships prior to withdrawing any funds.

Additional Considerations When Withdrawing From Your 401k

In addition to the financial toll taxes and penalties can have on your funds, it is important to consider to effect of the loss of future investment growth on your retirement money. This loss can be in the thousands of dollars, and seriously jeopardize your financial future.

There are not only early withdrawal rules for 401k, there are also rules governing the amount you can contribute to your 401k plan each year. That means that you can not make catch-up contributions at a later date, even if you are on more solid financial ground.

While there are drawbacks to a 401k loan, this may be a better option if you find yourself in a financial situation and your only option is your retirement funds. In most circumstances, a 401k loan will be more desirable than a withdrawal from your 401k account.

Every situation is unique, and only you and your financial planner can decide what is right for you. Visit the Retirement Center at industry leader ETrade, to customize a retirement plan that is right for you.

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  5. Rules And Regulations Regarding IRA Hardship Withdrawal
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  8. When Do I Have To Take Money Out Of My 401k?

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