401k Penalty

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Facts about the 401K penalty are things that most people are not aware of simply because they are not informed properly. First things first, a 401K plan is the most common method that people use to save their retirement. When the account is created, it allows people to save dollars that have not been taxed yet and to invest in stocks and even in bonds. Sometimes an employer even matches your funds with funds of their own which will make you earn free money. However, due to inevitable financial hardships brought about by several factors, people sometimes use the money from this account. And many people are actually wondering if this is a good practice or not.

The law says that if a person with a 401K account withdraws some money from it before reaching the age of 59, he/she will be asked to pay for a high rate of tax. The money in your account will then be given a certain amount of tax because it will be treated like usual income and it will then be provided to the Internal Revenue Service. The percentage rate of penalty which will be taken out of the account is 10%. Come to think of it, this is a very huge amount that you will be giving up to the Internal Revenue Service or IRS. You should remember that if your main concern is to save money, the last thing on your mind should be withdrawing money from you 401K account.

Although it seems like a mortal sin to withdraw money from this account, it is also nice to be aware that the IRS can give exceptions to only five cases. This means that the IRS will approve of you withdrawing money from this account without charging you with penalties if any of these five situations apply to you. The first is that there are legal proofs that you and your family have a large medical bill to pay for. The second situation if your home is on the brink of being foreclosed by the bank. The third situation is if you and your family need to pay for something that is related to purchasing your primary home. Another reason why the IRS will allow you to take money from the account is if a direct family member or a dependent just died and you need to take care of the burial. Lastly, if a direct family member or you yourself need to pay for tuition fees for a decent secondary education.

You just have to remember that just because you have these certain reasons you will not be penalized ever. This is due to the fact that some companies really require you to consider them as their last option; if they do not have anywhere else to run to, they can shoulder all your financial burdens.

Even with all the exceptions, it is still best that you do not touch your account unless you are already retired. This is because the government clearly stated the use of the 410K account: the money should support you after you have reached the age of 59 and when you have already retired from your job.

You are responsible for a 401(k) withdrawal penalty if you are below 59.5 of age and you withdraw your money.  This penalty includes tax and a 10% fine to Internal Revenue Service (IRS).

401(k) gets its name from the Internal Revenue Code. It is under section 401 and then paragraph k.

401(k) is a retirement plan for employees which are tax-deferred.  If you want to join this plan, you will decide how much contribution you want. You can contribute for as much as 20% of your monthly salary. You will let your employer know   how much they will deduct on your wages.  This is a salary deduction which will be taken out before taxes, making you pay lesser on income tax.  It is very convenient since it is being deducted from your salary, you don’t have to worry of missing a contribution.

If you retire of leave you job before the age 59.5, then you are subject to tax and penalty. The reason behind the penalty is to avoid plundering.  However there are still ways of avoiding these penalties.  You just need to find a correct way to take your money out.

If you retire, get fired or leave your job after the age of 55 then there will be no penalty if the money is directly taken out from the plan. But if you rollover  your fund to an Individual Retirement Account (IRA) and then you withdraw the money, you will then have to pay tax and a 10% penalty until you have reach the age of 59.5.

Before withdrawing your money, make sure you know the reasons first. There are specific reasons where in you don’t have to worry of paying for 401k withdrawal penalty. These reasons are education, home purchase, non-reimbursement of medical expenses and eviction or preventing closure of home.  These possibilities are called hardship withdrawal.

Remember to withdraw from this plan only when necessary and if you have no other means of getting money.

If you make substantially equal payments for the rest of your life expectancy, then you can withdraw at anytime without penalty.  If you begin making a payment on this option, you must continuously pay for 5 years or until you reach 59.5 of age, whichever is longer.  In addition to this type of payment, if you are ordered by a court of a decree of divorce or dependent you will not be assess of a penalty.

Lastly, disability is one reason you don’t want to take on a hardship withdrawal.  We all know that medical expenses cost more than your adjusted gross income (AGI). But if incase this happens, contact your 401(k) company , fill out the necessary paper work and provide your proof of disability. Otherwise, you will assess of a 10% penalty for early withdrawal.

Before withdrawing your money from 401(k) plan, think and find other ways first. In case you can’t get money elsewhere make sure to have a valid reason before withdrawing to avoid 401k withdrawal penalty.  Replace the money that you withdraw, in the long run you will need this to survive.