401K Withdrawal Penalty

Penalty for anything under the sun, pinches. But when it comes to something legal, it can be a big reason for being scared. Most of the time, we do not know how to handle such things and one amongst them is the 401k. Planned for your (you, the employee) good only, this is a retirement plan under the Individual Retirement Account (IRA). This is a small percentage of your salary given by the employer which is tax-free and is supposed to be withdrawn after completion of your entire working tenure.

401k Withdrawal Rules

So, as mentioned above, 401k is a retirement plan and but it obviously implies the duration of 'money depositing' to be completed till the proper retirement comes. Let's have a short overview of the 401k withdrawal rules now in the following paragraphs.

The 401k withdrawal rules are about withdrawal and nothing else. It specifies the eligibility criterion, the terms and conditions for withdrawal, etc. It is an interesting point to note that the government by itself does not have any measures for enforcing these rules. It is entirely up to the employers to ensure that rules of 401k withdrawal are followed. One of the important rules is that it is usually not allowed for persons who are less than 59.5 years of age. However, there are some exceptions which we will see shortly in the section below.

There are some penalties for withdrawing from 401k and they are stated in the following lines. The first among them is the additional tax penalty. There is a good 10% penalty on the withdrawal which has stirred some discussions whether you actually end up paying twice the amount but, irrespective of the views, it finally remains unsaid to adhere to the penalty on the 'tax-free' amount. That is to say that the money no longer remains tax-free the moment you opt for 401k withdrawal.

Borrowing against 401k is yet another option that again comes with a string attached. When you are in urgent need of money and cannot tap on sources of any other kind, you might think of borrowing against 401k. However, the amount you need should be exactly the same as your requirement and can no way exceed the same. The amount of your 401k can be given to the nominee upon your death. If you yourself wish to have the amount prematurely, you gotta become handicapped or disabled. The early withdrawal from 401k will be allowed to you if you terminate your employment provided you are not being less than 55yrs of age.

Next comes the medical expenses. The allotted amount, or percentage is 7.5% of your income. In case the amount goes beyond the same, this will not be penalized. Then, if you religiously adhere and pay the periodic payments as per Section 72(t) for the same, it will be considered as withdrawal without penalty. If you are facing foreclosures, undergoing divorce settlement, or unable to meet the basic daily expenses, you are exempted from the penalty.

Other conditions for being exempted from the penalty is investing the amount in some other type of retirement plan within a period of 60 days following the withdrawal. There are some other cases wherein you do not have to worry about the penalty and those are: If the case is of qualified domestic relations disorder, which refers to legal ownership issues and 401k hardship withdrawal. That is to say, in case you have to pay some medical insurance money as a result of a 12 week-long unemployment stint.

So having read all about the withdrawal penalty, I am sure you will be interested to know about 401k withdrawal for home purchase, so have a look at the incorporated link for the same. But... there is always a but, do keep in mind that although the penalty is revoked for first time home buyers, it is valid only for the first $10,000, and after that, you are into the snatches of the penalty.