401k Penalties Explained

401k Penalties Explained

401k Penalties Explained

The 401k penalties once explained are actually fairly simple and straightforward, that's not to say they're not awful and to be avoided, but still simple to understand.

The first thing to understand is that this withdrawal fee only happens when you're withdrawing early. If you leave your investments alone to grow until you reach retirement age then this won't be an issue for you.

When you withdraw early, however, there are things you need to understand. First of all, you can't do this any time. There are only certain windows when this is possible, mainly right after you leave a job. Immediately after leaving the employer you have your account with you have four options for what to do with your retirement savings: leave it where it is, roll it over to your new employers plan, roll it over to an IRA (independent retirement account), or cash out.

When you withdraw early you pay the 401k penalties explained here, which is a very heavy price to pay. You will have to pay both state and federal taxes, plus a ten percent fee. This can easily add up to twenty to thirty percent total, depending on your tax bracket. Ten percent may not sound like a big deal, but it really is a huge chunk of your savings. You'll also miss out on money for your retirement, both the funds you withdrew and the money you would have made from your investments between now and the time you reach retirement age. All of this together adds up to a huge cost that most financial experts suggest you avoid at all costs.

If you can find another route to find the funds you need, such as a traditional loan or if your employer offers loans from your retirement account, consider these options instead because the 401k penalties explained above are a very cost to your retirement.

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