What Is The Penalty For Withdrawing From A 401k?

Cashing out a 401K before you reach retirement age has a much heavier penalty than you may think

. This will stop most people from deciding to withdraw early, but if you decide you have no other option, there is still more you need to know, for instance, you can't actually do this any time you want to, you can only withdraw at certain points in your life.

First of all, you can of course withdraw from your plan without any problems or penalties once you reach 59 years and 6 months of age. Until then things are a lot more complicated.

Before you reach retirement age the only other time you have the choice to cash out is immediately after you have left an employer. Actually, when you leave a job you have four options of what to do with your retirement account. You can switch to your new employers plan, rollover to an IRA, leave the money where it is with your former employer, or you can cash out-but with penalty.

Withdrawing early will lose you a lot of money. There is a ten percent early withdrawal fee straight off, and then there is both federal and state taxes. The state tax percentage is different in every state, and federal percentage levels vary depending on your income bracket (which may be raised this year because the money you withdraw will count as income for the year). Due to these varying factors the percentage varies from person to person but you can estimate that you will lose thirty to forty percent of the money you withdraw, as well as the money you would have earned during the time this money would have been invested until you reached retirement. This very high loss is why financial experts will advise you to find any other way to avoid withdrawing from a 401k.

There are some exceptions to these rules with some plans, so you'll need to look over your employers options. Some will let you withdraw under special circumstances, such as economic hardship or for tuition, and some will allow 401k loans. Of course, even under these circumstances, there will still be the penalties explained above.

The penalty for withdrawing from a 401k is high and drastically reduces the amount of money you'll have right now, as well as for your retirement.

by: Jennifer Quilter

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