Whether you are changing jobs, faced with an unexpected expense, or are retiring from your career you may be wondering what your 401k withdrawal options are.
There are many reasons why you may chose to look into your 401k withdrawal options, however every circumstance is unique and you need to be aware of your options, as well as penalties and consequences for early withdrawal.
Options And Consequences For 401k Withdrawals
You have various options for withdrawing from your 401k, and it is critical that you understand these choices, as some of them have serious tax implications. 401K account holders normally choose a lump-sum payment when withdrawing for their accounts, however, this options carries a heavy tax penalty.
You have several withdrawal methods available to you, but it is important to remember that your options vary from employer to employer, as well as plan to plan. All of the choices for withdrawal that are mentioned here may not be available with all plans.
You do always have the option of leaving the money in the account. This is of course the simplest option, and it incurs no penalties. You can also withdrawal the money in one lump sum. As mentioned before, this option carries steep tax penalties.
There is also the option of rolling over a lump sum into an Individual Retirement Account, or converting funds into an annuity. You can also withdraw funds in increments. When withdrawing from your 401k, you can always use a combination of these options.
Find The Option That Is Right For You
The choice that is right for you depends on a number of elements including your age when you will be withdrawing the money, your personal income, as well as how much debt you are carrying. There are several pros and cons with each option that should be carefully considered when withdrawing money from your 401k.
No matter what state the economy is in, you will have to withdraw your 401k money eventually. Just as there are tax penalties for early withdrawal, if you have money in your 401k account past the age of 70 you may also begin incurring additional tax penalties.
Of your many 401k withdrawal options, the two that are true withdrawals are the lump-sum payment and the installment payment. There are benefits as well as drawbacks to each option, and you should carefully consider these issues when withdrawing funds from your 401k.
Lump-Sum Payment Pros And Cons
One of your choices for withdrawing money from your 401k is a one-time, lump-sum payment. The main benefit to this option is that you have maximum liquidity. You are able to withdraw the bulk of your savings, subtracting fees and taxes, and use the money for whatever you would like.
The major downside to a lump-sum payment is the tax penalties. You are required to pay taxes on whatever amount you withdraw from the account, which can be around 20%. Add that to a possible 10% for early withdrawal penalties if you are not 59½ at the time of the withdrawal. The 30% tax on your money is a good reason to think long and hard about withdrawing money early from your 401k account.
Installment Payments Pros And Cons
Find out if this choice is available to you by checking with your employer. This method allows you to space out your payments over months or years. This will provide you with a consistent source of income, but will also limit your options.
There is always the option of combining strategies when withdrawing money from your 401k account. You could make a lump-sum withdrawal while also converting a portion to an IRA. This avenue can be more challenging than using only one option, so it may be wise to enlist the help of a financial professional.