Early Withdrawal From 401k

Why know about an early withdrawal from 401k plan when retirement is far away on the other side of the horizon? What you are planning to do after you retire from the present job? Work somewhere else to make money to pay for the expenses which you will have to pay in order to live. The government, to avoid such a situation, has instituted pension plans like IRAs and 401k which can support you and your family after you have retired and are ready to rest your weary bones. The investment plans such as 401k are meant to encourage you to save up enough money from your jobs. You can do so by following 401k contribution limits, so that, you have something to look forward to when stepping out from your workplace for the last time after your retirement party with a retirement gift in your hand. The following paragraphs give information on early withdrawal from 401k and the penalties associated with it.

Penalty for Early Withdrawal From 401k

For this reason the government tries to keep you in line and prevents you from any early withdrawal from 401k and other such plans, so that these funds are available when you need them most. In its efforts to check you, the government levies a 10 percent penalty and necessitates that you report the early withdrawal from 401k as income. This requirement makes it go on to the federal income tax return and you know what that means. You pay income tax for this reported income and with the penalty imposed for it, it may turn out to be a too big a dollar pinch for a working man like you.

Withdrawal From 401k

If you withdraw any money from the retirement plans such as 401k, 403b, or an IRA (Individual Retirement Account) before attaining the age of 59 ½, your action is termed as an early withdrawal and there are some 401k withdrawal rules that one must abide to. However, there are conditions in which an early withdrawal from 401k plan is allowed before retirement and no penalty is levied on it. The following is a list of such withdrawals and distributions because the intentions behind them are considered necessary. However, it is mandatory to report them in the federal income tax return. In some circumstances, to stop being penalized for an early withdrawal from 401k, you have to pay estimated tax payments.

• An early withdrawal from the 401k plan goes penalty-free, if you are doing so to avoid eviction from your house or foreclosure on it.
• Your becoming permanently disabled due to some accident or misfortune also qualifies the early withdrawal from the 401k to be penalty-less.
• Medical expenses exceeding your gross income by 7.5 percent, enables you to withdraw funds from 401k. The amount withdrawn must match the expenses you are facing in excess of 7.5 %.
• The penalty for early withdrawal of 401k is not imposed if its purpose is to meet periodic expenses over the life expectancy of the owner or his beneficiary after death.
• If the withdrawn funds are made to the beneficiary after your death or to your estate.
• An early withdrawal from 401k goes penalty-free, if you invest it in another retirement plan within 60 days of withdrawal. Before you do so it is necessary to know the difference between 401k and IRA, and the tax benefits obtained by investing in each of them. If you decide to invest in IRA, do so after knowing the penalty for early IRA withdrawal for the better management of your funds.
• If you are a part of the employee stock ownership plan, then the dividend paid on the stocks you own, can be withdrawn penalty-free.
• Some due funds are distributed to you after your employment has been terminated by the employer. If you were in the 55^th calendar year of your age or more at the time of termination then, if you make an early withdrawal from 401k to the tune of these funds then it goes penalty-free.
• Withdrawals from 401k that are made to meet expenses such as divorce settlement and to meet necessary living expenses are also penalty-free.

After retirement, you may only wish to head towards a few peaceful moments at the end of a lifetime of toil. The purpose of funds in the various pension plans is to meet your future needs when you may not be able to go out in the market and sell your skills. That is why, an early withdrawal from 401k is frowned upon and is discouraged and penalized. When it comes to how to calculate 401k early withdrawal penalties you must consider, your rate of federal and state income tax to determine the total income tax and add 10% of the penalty imposed upon the early withdrawal from 401k plan. Rather than pay such a substantial amount in penalties, consider borrowing against 401k instead.