Article Treasure Cove

There can be a time where you find yourself in a position where you want to grab money out from your 401k early. But that doesn’t come without a few penalties. What are these penalties and how can you get around them?

The first thing you can come across when trying to pull out money of your plan when you are under 59 ½ is the early withdrawal penalty. This is a 10% penalty it is meant to discourage people from dipping into their savings too early.

In addition to this you will also have to pay income tax on the money. There is nothing you can do about the taxes there can be certain situations where you would be able to pull money out of your 401k early without having to take the 10% penalty.

This could occur if you qualify for one or more of the 401k hardship withdrawals. For instance if you have just become disabled and are no longer able to work then you might qualify to take money out early without a penalty.

There are some other situations such as college loans or buying a new house that you might be able to tap into your account early, but you should talk with a financial expert before making any major decisions.

If you don’t qualify for a 401k hardship withdraw then you may be able to take out a 401k loan. In this case you will have to pay back the loan within a 5 year period.

But this comes with its own disadvantages. For one you will be forced to pay the loan which give you more expenses. If you are unable to pay off your current bills then taking out another loan can make things even worse.

One other disadvantage to using this is that your specific may not allow you to invest any more money into your 401k until you repay the loan. So if it takes 5 years for you to repay it you could be missing a chance to save up money. Not only that but you would also miss the chance of getting money for free if your employer rewards you for investing into your plan.

So with all of these rules and regulations which is better ? Hopefully you will never have to make that decision. Taking money out from your retirement only hurts your future.

If you are truly in an emergency and don’t qualify for the 401k hardship withdraw then it depends. If you just need a very short term loan then it can be an option but if you are in a big financial mess then taking out a loan may only hurt you further. In that case taking a 401k withdrawal could be your only option.

Perhaps a better idea is to put some money away in an emergency fund this way you will not have to be looking for your 401k to get you out of trouble. This strategy can be simple yet also effective.

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Tags: 401K