401k Withdrawal Rules

Do you know that there are certain 401k withdrawal rules? Are you thinking of making a withdrawal from your 401k? Is that growing sum of money enticing you? There are a few things to consider when contemplating making an early withdrawal from your 401k retirement account. 401k withdrawal rules are simple and easy to understand, and being aware of them can save you tens of thousands in taxes and early withdrawal penalties.

Generally, withdrawing money from your 401k before you are of retirement age can have several ramifications. First, you will have to pay twenty percent of your 401k to the IRS in penalties. Second, you will have to pay income taxes on any earnings you have made through the account. This amount combined with the penalties can add up to thirty-five or even fifty percent of your 401k withdrawal. This can take a huge chunk out of your investment principal and completely wipe out your gains. 401k withdrawal rules make taking money from your account a financially painful action.

However, there are a few exceptions to these rules. There are some circumstances under which the Internal Revenue Service will allow you to take money from your 401k without punitive penalties and overtaxing. The most common of these is disability or death. If you can prove that you have been permanently disabled, you will be allowed to use your investment funds before official retirement age. 401k withdrawal rules also allow your beneficiaries to receive your funds immediately should you pass away.

If you are in a divorce or custody court case and the judge orders you to hand over a chunk of your 401k to your spouse or ex spouse, you can do this without penalty as well. This rule was made to avoid subjecting people to two conflicting laws during the difficult time of divorce. It is unfortunate, however, to lose this level of savings.

If you have suffered a severe illness or injury and your out of pocket medical expenses exceed 7.5 percent of your annual income, 401k rules will also allow you to withdraw the money you need to pay off your bills. You will, however, be required to itemize your deductions when you file annual taxes.

Last, you can take money from your 401k retirement account before official retirement age if you are fifty-five years of age or older and have elected to retire early. It’s important to talk to a professional financial advisor before taking this drastic step. There are many things to be considered before opting for early retirement, and penalties may be the least of your worries.