Thoughts On 401k Withdrawals

401K Withdrawal 

If you are planning on pulling out of your 401(k) plan, then you should be aware that there is a 10% penalty for early withdrawals. Now, this makes sense if you are really in need of the money and can’t wait until retirement age, but what about those who want to retire early? Here are eight strategies to avoid the 10% penalty for early 401(k) withdrawals.

THE BREAKDOWN OF WITHDRAWING FROM YOUR 401K

No matter the amount you want out, if it’s before the age of 59 1/2 you will be penalized. 30% will be taken from taxes, a 10% withdrawal fee, and then 60% is the remaining balance. So, 40% of what you withdrawal is not going to be given to you.  In some cases, it may be more of a deduction. So, make sure you think about how much you are willing to sacrifice to get money from a 401k withdrawal.

CONSEQUENCES OF AN EARLY 401K WITHDRAWAL

One of the perks of 401(k) plans is that they allow you to withdraw from your account early and penalty-free. If you’ve ever felt the need to dip into your retirement savings, and the temptation was too much to bear, you can chalk it up to a good reason for withdrawing. After all, if your cash flow is tight, tapping into your savings is better than racking up a bunch of credit card debt. But there are consequences of a 401(k) early withdrawal that you should be aware of — and they’re not just about getting slapped with a 10% penalty on top of what you take out.

Tapping into your 401(k) means dipping into your future self’s retirement stash. You’ll be paying taxes on the distribution at either the 15% or 25% rate (depending on whether or not you’re over 50). That reduces the amount available to invest; in some cases, it could potentially wipe out the annual contribution limit altogether. If that happens, any additional contributions won’t get matched by your employer until you catch up.

And there’s another consequence of a 401(k) early withdrawal that you should consider: Once you take money out, it becomes taxable income for the year. This means that if you’re retired and your income is limited, you could find yourself having to pay taxes on the money that you took out of your 401(k).

A 401(k) early withdrawal can also have an impact on the Social Security benefits that you’ll receive in future years. When you start taking distributions from a 401(k), it reduces your total earnings for the year, which is important because those earnings determine how much in Social Security benefits you’ll get. If your distribution pushes your income below the maximum threshold for Social Security, your benefit will be reduced by a certain percentage. If you’re under full retirement age and haven’t started collecting Social Security yet, this could mean giving up as much as 25% of your Social Security benefits.

If you are considering taking money out of your 401(k) early, you should consult a financial advisor to discuss the potential impact on your retirement savings and Social Security benefits.

HOW LONG DOES IT TAKE TO GET A 401K WITHDRAWAL AFTER LEAVING A JOB?

It usually takes about two business days, but it can take up to 10 business days. It’s less time if you have a check from your investment company or if you have already transferred the money to an account that is ready for payouts.

HOW TO AVOID PENALTIES FOR EARLY 401K WITHDRAWALS

See if you qualify for an exception to the 10% tax penalty

You can withdraw some or all of the money in your 401(k) at any time. However, before you do, check whether the following exceptions for early withdrawal apply to you:

Exception 1: You are 55 years old or older

Exception 2: You are permanently and totally disabled (according to Social Security Administration standards)

Exception 3: You have a financial hardship such as losing your job, paying medical expenses that aren’t covered by insurance, or buying a home

Exception 4: The distribution is part of a series of “substantially equal periodic payments” made over your life expectancy and you will not receive more than $10,000 total from these payments.

If one of these exceptions applies to you and you want to avoid the 10% tax penalty, you can use a distribution form that is provided by your 401(k) plan. Always do your research, laws change all the time. 

See if you qualify for a hardship withdrawal

If you’re facing hardship and need to tap into your 401(k), see if you meet one of the criteria below.

Qualifying factors for hardship withdrawals

1. Unreimbursed medical expenses in excess of 10 percent of your adjusted gross income

4. Health insurance premiums if you’ve lost your job and received unemployment benefits for more than 12 weeks (or would be eligible for unemployment benefits if you hadn’t quit your job)
5. Payments necessary to prevent eviction or foreclosure on your home
6. The cost associated with the death or disability of a family member. This only applies if the cost exceeds 7.5 percent of your adjusted gross income.

Consider converting your 401(k) to an IRA

If you don’t need the money immediately, consider keeping your 401(k) intact until retirement and converting it to a traditional IRA or Roth IRA once you leave your job. That way, when you do take distributions in retirement, they will be tax-free if they come from a Roth or be taxed as long-term capital gains if they come from a traditional IRA. And in either case, there will be no withdrawal penalties.

Take out the bare minimum when cashing out a 401(k)

When you start cashing out your 401(k), it is important to take out the amount you need, not the entire amount. For example, if you need $10,000, take out $10,000 with no penalties. If you need $20,000, then take out $20,000 but only pay a 10% penalty.

The 10% penalty is based on the total amount that was withdrawn and this means that if you just withdraw one lump sum of $20,000 and then take it back out again later on in life when you don’t need it anymore there will be no penalty. This strategy helps avoid unnecessary penalties and unnecessary fees.

CONCLUSION

401(k)s are a great way for people to save for retirement. But early withdrawals can come with a 10% penalty. This means that you could lose 10% of the amount you withdraw from your retirement account. The good news is that there are ways to avoid this penalty.

If you are considering cashing out a 401(k), be sure to consult with a professional financial advisor to determine the best course of action for you and your family.

I hope that gives some insight into what 401k withdrawal can be. Please think long in hard about what you want to do. What gets me the most is not the loss of 40% (which is bad), but the loss of potential growth. Please remember, this is just my opinion, not financial advice.