401K Early Withdrawal Penalty
The 401k Early Withdrawal penalty is a heavy price to pay, that if at all possible, should be avoided.
This fee is paid when you cash out your account before turning 59 years and 6 months old. You can only do this when you've reached retirement age (in which case there is no fee) or when you've left your current employer. You have a very short amount of time to decide what to do, usually about thirty days. When you leave your job you can decide to leave the money in it's current plan, rollover to your new employers plan, roll into an IRA (independent retirement account), or cash out.
When you cash out the 401k Early Withdrawal penalty takes a great deal of your accounts balance. There are three different parts that must be paid: federal taxes, state taxes, and a ten percent penalty. The federal tax percentage is determined by your tax bracket, which can be found on your last years tax papers. State tax varies state to state, but is typically somewhere between five to ten percent. When added all together these three parts can amount to thirty to forty percent of the amount you take from the account, plus the money the account would have accumulated up to the point of retirement.
If you need money now and see this account as your only option for funding, there are some circumstances where you can use this money and avoid the 401k Early Withdrawal penalty.
If you are in a situation of economic hardship, where you will lose your home or have medical bills, you can fill out economic hardship paperwork and apply to get take some money from the account. You do have to repay this money, though.
Some plans will allow you to do 401K loans. You are allowed to borrow from the account up to 50% of it's balance, or $50, 000 (whichever is less). You do have to repay this money and pay interest, but the interest rate is low, and the interest you pay is put right into your account, so it's not really a loss. This money does have to be repaid within five years or else it is treated as though you originally cashed out and you have to pay the early withdrawal penalty.
With some plans you are also able to withdraw to use the money to pay for college courses if the classes will further your current career. You'll want to check with your plan provider to see if this is available to you.
Because of these harsh fees, and the loss of your main retirement savings, it is important to avoid paying the 401K early withdrawal penalty.
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Article Source: ArticlesBase.com
