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.

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