401k And Ira

401k Withdrawal

Consider Your Options For 401K Withdrawal

401k Withdrawal

The essence of 401K is to save money for retirement. Retirement planning is something that all individuals should make preparations for. The quality of life that you lead during year senior years will depend on the decisions you make for saving and investments. There are however, events that occur during life that can prompt one to consider 401K withdrawal. Whether you incur unfortunate medical expenses, want to make a home purchase or simply execute a 401k hardship withdrawal, there can be consequences and penalties for doing so. That's why it is important to be aware of 401k early withdrawal rules to avoid incurring penalties and compromising your savings and investments.

In most cases, it is preferable to investigate 401K loans before cashing out 401k. These loans offer a superior alternative that do not incur penalties unless you breach the conditions which are associated with them such as failing to pay back in the required period or defaulting.

401k Withdrawal

However, not all employers will offer 401K loans or you may not be eligible. In this situation, if you have exhausted your other possibilities, you can apply to access your money under four stipulations. You must have an immediate or sever financial need, the money is necessary to satisfy that need (i.e. you have exhausted all other possibilities), the money you are applying for does not exceed the amount of the need, you have exhausted all non taxable loans available under your 401k plan. Provided you satisfy these conditions, you may apply for the funds. They will be subject to taxes and a ten percent penalty. You are confined to use the 401K early withdrawals for educational purposes, severe financial hardship, to prevent home eviction, for a primary home purchase or for medical expenses.

There are other 401K withdrawal rules that are classified as a non financial hardship withdrawal in which the ten percent penalty fee is waived. The stipulations for this are that you become permanently disabled, your medical debts are greater than 7.5 per cent of your adjusted gross income, you are subject to a court order to distribute funds to a spouse, child or dependent, you are permanently laid off, quit or retire in the same year that you turn 55. The other instance is where you have been laid off, quit or retire and have established a payment schedule for the duration of your life.

For individual's not enduring financial hardship, a 401K withdrawal can present a range of scenarios depending on your age. If you are over 59 1/2 , you can take a lump sum distribution, subject to an IRS 20% withholding tax. This amount will be factored into your taxation return. If you are less than 59 1/2 you will be subject to the 20% withholding tax and also a 10% penalty.

It is wise to consider the options before being subjected to 401K withdrawal penalties.

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