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Article provided by: DMB Soto Insurance Services

What is the penalty for early 401k withdrawal

The IRS offers a number of ways in which you can make withdrawals from your retirement funds before you retire. But, these avenues are strictly regulated, meaning you cannot just get cash from your 401(k) or IRA every time you need money. And if you do, it’s accompanied by a 10 percent penalty on the withdrawn amount, plus federal income tax.

At The Financial Architects, we’re a group of qualified and experienced financial advisors. Most of our work revolves around helping employees make good choices when it comes to money decisions. If you’re considering taking some money out of your retirement account and wondering, what is the penalty for early 401k withdrawal, we are your go-to company for reliable and sound information.

How Can You Reduce the Expenses on Your 401(k) Withdrawals?

Through careful calculation and planning, you can save a lot of money on your 401(k) account. Here are some ways to ensure that you don’t lose funds unnecessarily when making withdrawals:

  • Only make withdrawals from your previous employer’s plan if you leave the job after the age of 55. You will be allowed to make early withdrawals without tax penalties at this time. If you leave your employment before you have attained the age of 55, it’s advisable to roll your fund into your new 401(k) plan or IRA to avoid fines.
  • Where possible, create a Roth 401(k) account, where you will contribute after-tax money. In the future, you’ll enjoy tax-free withdrawals. You’ll also not pay tax on the gains any of your investments earned.

If you feel that it’s absolutely necessary to take money from your retirement savings at a time when you could be faced with penalties, try the 72t rule.

The 72t Rule

The 72t is issued by the IRS and allows early penalty-free withdrawals from a 401(k) account. Using this provision, you can take five or more substantially equal periodic payments within five years, or until you reach the age of 59½. The amount that you receive over this period cannot be adjusted. While there will be no penalties charged, you will be charged the regular income tax. It’s advisable to consider the 72t rule only when you have exhausted all other means of getting funds as the withdrawals can adversely decrease your savings.

How Can You Get Hardship Withdrawals?

To get approval for a hardship withdrawal free of any fines, you have to prove your financial situation is critical. This should be done when filing for a distribution request form provided by your plan administrator. You can prove your financial situation is pressing by providing evidence such as your medical bills if you want to cover healthcare expenses.

Saving for the Future

Your retirement account shouldn’t be your backup bank account, and you should only make early withdrawals when it’s only necessary. To know more about what is the penalty for early 401k withdrawal, and tips on how you can avoid it, contact us today on (888) 350-5396. We will guide you in making the right choices when it comes to saving for your future.

What is the penalty for early 401k withdrawal
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