401k Early Withdrawal

Written by on January 17, 2013 in Money - No comments | Print this page

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empty-waletA 401(k) is a type of a savings account for retirement in USA. The term 401(k) was taken from the subsection of the Internal Revenue Code of the United States.

A contributor can withdraw the funds in the savings account upon reaching 59 ½ years. The 401(k) is an alternative to retirement pension traditionally used by citizens.

According to statistics, up to 60% of households with nearing retirement members have a 401(k) plan accounts. The 401(k) retirement account is kept until you reach the allowed age in order to withdraw or get distributions. In this way, the money gains additional benefits from growth due to investments. However, some people require money immediately, which make them withdraw the 401(k) early.

Withdrawing Funds

Withdrawing funds in the account is usually restricted by employers prior to the age of 59 ½ when the worker is still in service with the company. A 401(k) early withdrawal prior to the required age may mean payment of excise tax that is equal to ten percent of the amount distributed. Early withdrawals are subject to normal taxation as an ordinary income aside from the 10% penalty tax for early 401(k) withdrawal.

The presence of 10% penalty tax due to early withdrawal is waived upon presence of the following considerations:

  • The person died and the money is given to the beneficiary
  • The person becomes disabled
  • The person resign and is at least 55 years old
  • The withdrawal is associated with qualified domestic relations order
  • The person begins equal periodic payments that are substantial
  • The person withdraws an amount, which is less than the allowable as a deduction for medical expense
  • The person becomes indebted of medical expenses at least 7.5% of the gross income
  • The court requires you to give the money to your child, divorced spouse of dependent

Consequences of 401(k) early withdrawal

Aside from the tax penalty, a person who withdraws the retirement fees early may lose the possible growth of the retirement money. Delaying withdrawal is beneficial to maximize the growth of your money.

The allowed withdrawal of 401(k) retirement plan without consequences such as tax penalty is made when the following conditions are incurred:

  • The contributor dies or become disabled
  • Separation from work
  • Reached the age of 59 ½ years
  • There is financial hardship

Financial hardships must be made in order to withdraw the funds in the absence of other factors. A financial hardship is permitted by the Congress when the following reasons are present:

  • Buying a primary residence
  • Paying college tuition of a dependent or your own, provided that the tuition must be made within the next 12 months
  • Preventing Foreclosure of your house
  • Paying medical expenses of your own or dependents that were unreimbursed

Early withdrawal of 401(k) distributions may be an emergency situation to other people because of need for money. However, in order to maximize the benefits of the retirement plan, a person is advised to wait for the allowed time until the withdrawal is permitted.

This is a guest post.  Danaz is a blogger, he writes on Payday loans along side instant loans services. On this website, he encourages people to take payday offers especially when there’s no means for things people needed on daily basis.

Image courtesy of graur razvan ionut / FreeDigitalPhotos.net

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