Early Withdrawal From 401K

FinanceTrading / Investing

  • Author Florentina Kosse
  • Published September 12, 2011
  • Word count 435

There are certain policies that facilitate the early withdrawal of 401K. There is a procedure for the early release of these funds but it is chaotic. You may opt for early withdrawal but after you go through the procedure to do it, you may decide against it. The procedure for the early withdrawal has been developed by federal government to make sure that individuals don't undertake premature withdrawals as they are meant for life after retirement.

In addition to this the release of your post retirement funds may get you into a higher tax bracket. This will lead to an increase in the taxable income and thus, implies more losses due to tax. The distribution pattern for the federal taxes is also applicable to the state income taxes.

An age of less than fifty-nine and a half makes you liable to pay taxes, which is up to the 10 percent of amount withdrawn. If the federal and state taxes are combined to the 10 percent penalty, it can reduce your savings from $100,000 to $50,000. But, you can prevent yourself from such losses in case of exigencies such as death and before date retirement. If you undertaking an early retirement after the age of fifty-five, give consent to get post-retirement funds in the form of equal installments, you incur medical expenses more than 7.5 percent of the total income, you save 10 percent of penalty. However, these conditions may save you from the penalty but cannot save from the high federal and state income taxes.

If you face some emergencies, you may request for early withdrawal under the clause of hardship withdrawals. The clause of hardship withdrawal is the only thing that can save you from penalty. But, this hardship 401 withdrawal is only applicable, when you are over the age of 59 years and 6 months. If you hope to get some relief due to the clause of hardship withdrawals, you will have to prove that your all other financial resources have been depleted and you have nothing left to meet the emergency.

These exigencies may include eviction from your house by force and also when all your assets incomes are not sufficient to meet your expected and unexpected living expenses. The reason that you are not being able to repay your debt and it is causing severe problems does not render you qualified for the hardship withdrawal. You have to get the proof regarding the hardship and prove it beyond doubt that you have no other alternative, other than these post-retirement funds. However, it should be kept in mind that proving your hardship can help you save penalty but not the taxes.

Premature 401k withdrawals are considered as incomes and these incomes are considered taxable under the law. The rate of income tax that is applicable to these sources of income is 25-40 percent. The tax that will be incurred is huge and will thus, considerably reduce the thickness of your post retirement funds.

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