401k Penalty

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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.