Taking Out Early Withdrawals From A 401k
Posted By tsauthor on October 29, 2009
Did you know that you can take money out of your 401k early ? While not always a wise decision it can help you out if you are having a hard time and desperately need money now.
Even though it isn?t favorable to take out money early there are ways to can do just that, just make sure that if you do you are withdrawing because you need to take money out and are not just doing it to buy some new fancy car.
So what happens if you decide to take money out early? According to the 401k withdrawal rules you are able too take money out before the age 59 ½, however you will have to pay a 10% penalty on your money and you will have to pay taxes on that money.
Having to pay both can really take a chunk out of your money. It can also have a bad impact your long term retirement account. If you take out $15,000 today that means you will have less money when you eventually retire, which is when you would need it the most.
And when you factor in other things such as the interest you would have made on the money it can be even more expensive.
A way you can get around this is by simply taking out a loan from your 401k rather than taking out a withdraw. This will allow you to not get stuck with a 10% early withdrawal penalty and you will not have to pay taxes on it.
The 401k loan rules offer many benefits, such as a very low interest rate and a 5 year payback period. These benefits in some ways make it appear much more attractive to the average person then a simple withdraw.
But it has its disadvantages as well. For example you might not be able to deposit more money into your account while you have a loan out. This can severely harm the growth in your 401k plan and cause you to be unprepared when retirement comes around.
In conclusion there are many different options available for you when you need to take money out of your 401k early. However it should still be a last resort kind of deal. The impact it can have on your overall retirement account just cannot justify taking money out to buy a new car, but it can be justified if it is, say the only way to stop you from declaring bankruptcy.
That being said if you are in an actual emergency such as a disability or if you have a lot of unpaid medical bills that are piling up you may be eligible to tap into your account without having to pay the extra penalties for withdrawing. But check with your accountant to make sure you qualify before making a decision.
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