401k Withdrawal Rules

Withdrawing money from a 401k retirement plan is usually discouraged by both, the government and employers, as it is meant to be a saving plan to build up for your retirement. In fact, several harsh tax penalties are imposed on 401k withdrawals. This article gives all the 401k withdrawal rules, the circumstances under which a withdrawal is allowed without penalties and the various 401k withdrawal options that one has when one wishes for such a withdrawal. The following article also gives the IRS limits and 401k early withdrawal rules that apply to 401k withdrawals.

401k Withdrawal Applicability Rules
Usually, the government makes it very difficult for anyone to make 401k withdrawals if they are below 59.5 years of age. There are a few exceptions to this 401k withdrawal rule and these exceptions that make you applicable for a 401k withdrawal, are as listed below.

• To pay off yours or family member's large medical bills.
• To make a down payment on residential property. The 401k withdrawal rules for home purchase consider such a withdrawal reason as valid.
• To stall or prevent a foreclosure on house or other property.
• To pay for the college fees of a child or a spouse.

Though such immediate cash requirements that have valid reasons, allow for 401k hardship withdrawal, the IRA rules state that on availing such a 401k withdrawal, the person is not allowed to make any annual 401k contributions for at least 6 months thereafter.

Considerations at the Time of 401k Withdrawals
When looking at the 401k withdrawal rules, one can easily see that there are several considerations that one needs to make when thinking of making 401k withdrawals. One of the biggest things to consider while making 401k withdrawals are the 401k withdrawal penalties, i.e. tax penalties. Not only the amount withdrawn be charged as a normal income under whatever tax bracket the individual falls, but there is also an additional 10 percent penalty on the amount withdrawn. In certain circumstances, the IRA waives off the 10 percent tax penalty on 401k withdrawals and the circumstances are listed below.

• When the withdrawal is made by the family of the deceased 401k plan holder.
• When the 401k plan holder suffers a total and permanent disability.
• When the employee with the 401k plan retires, resigns from his job or is sacked from his employment.
• When the employee has reached or crossed 55 years of age.
• When you make a 401k withdrawal that is less than the maximum allowable amount for a medical expense deduction.
• When the employee begins equal or substantially equal periodic payments post withdrawal.
• When the withdrawal is made due to a qualified domestic relations order.

It is essential to note that as every 401k plan has annual 401k contribution limits on the amount of money you put into the plan, you are not allowed to make up for any withdrawals that you have made from it. This leaves you with one thing to note, a 401k withdrawal should be your last possible option to get money no matter how bad your financial need is. If it can be postponed, it definitely needs to be. In fact, even a 401k loan is preferable to a 401k withdrawal when it comes to all the pros and cons of it.

401k Withdrawal Options to Consider on Employment Termination
There are three basic cases to consider at the time of 401k withdrawals at the time of employment termination.

You are Over 59.5 but Below 70.5 Years of Age
You can either withdraw in a lump sum net of an IRA mandated 20% withholding tax, you can leave the amount with the previous employer till you actually need it or you can do a 401k rollover into an IRA account or get a solo 401k to start up your one person business maybe.

You are Under 59.5 Years of Age
Once again you can take a lump sum in withdrawal, of course after the 20% mandatory withholding tax is cut. You will also be charged with the 10 percent tax penalty unless of course you fall in the '401k penalty free withdrawals' exceptions. Alternatively, you can also either leave the amount with your previous employer till the need arises or you can do a 401k rollover or a solo 401k stunt.

These were some of the 401k withdrawal rules that affect your retirement planning. So before considering a 401k withdrawal, think about the 401k benefits that you will have to sacrifice, look for other options and only then take any decision. Till then, plan your withdrawals only after being fully aware of the 401k withdrawal regulations that affect your decision.