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401k Withdrawal

Although a 401k withdrawal is not generally recommended, it is certainly allowed. Depending on the situation, steep penalties and punitive taxes may be applied. There are several rules and regulations regarding withdrawing money from 401k that should be considered before making a final decision. Once you take the money from the account, there’s no turning back.

Most 401k plans allow withdrawals without penalties in a small set of circumstances. Called a ‘hardship withdrawal’, this includes high medical expenses, expenses involved in purchasing your primary residence, paying for college educations for yourself and your children, and preventing eviction from your current home. There are several clauses governing these withdrawals and some may be excluded from your particular account, so it’s important to thoroughly explore your options with your financial advisor and/or plan administrator before making a withdrawal from your 401k account.

Even if you qualify for a hardship withdrawal, there are good reasons not to take advantage of the hardship withdrawal clause. First, the money you earned in your 401k account grows so quickly because the earnings create more earnings. A 401k withdrawal will mean losing not just the money you have earned, but the money that you could have earned by leaving the account intact. Also, some plans may restrict you from investing more money during the six months after your withdrawal, further lessening your potential income. Investing money—and leaving it invested—is a crucial part of planning for retirement. Withdrawing money from your 401k account completely undermines all of your previous efforts. A few thousand dollars withdrawn today can cost you hundreds of thousands in retirement income.

If you do not qualify for a hardship withdrawal, the economic picture becomes even more dismal. In addition to losing the potential earnings and dividends, you will be forced to pay a twenty percent penalty as well as normal income taxes on all of the money you withdraw from your 401k. If you made a portion of your contributions from post-tax income, these will not be subject to income tax, but still will be cut sharply by the penalties. Altogether, most people find that they lose between thirty five and fifty percent when they make a 401k withdrawal. Even in emergency situations, this kind of loss is rarely a good long term idea, especially when it comes to your comfort and security in your golden years.

Before you make a 401k withdrawal, you should ask yourself: are there any options to withdrawing money from your retirement account? Many plans allow people to take loans from the money they have saved and even to pay themselves the interest. This can be an excellent alternative in truly dire situations.

In this bleak economic climate, many people find the money sitting in their 401k retirement account even more enticing. However, it’s a good idea to leave this money where it can make a positive contribution toward your future. While removing your money from your account is always your personal choice, it’s important to make good choices when it comes to your future happiness and security.

401k Withdrawal
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