401k Early Withdrawal
When you withdraw money from your 401k
before you retire, you are taking a
401k early withdrawal. 401k withdrawals are
taxed as ordinary income but a 401k early withdrawal is not
only taxed as ordinary income but it also carries a 10% early
If possibly, you should not
take a 401k early withdrawal because assets in
401k plans accumulate tax deferred which means
you don't have to pay tax on your 401k
contributions until you withdraw. When you
withdraw, you are taxes at your income
The more asset you have in your 401k
the more money you accumulate fast. If you make a
401k early withdrawal, you forego the tax deferral
benefits, have to pay the early withdrawal penalty and it
will be hard to put more money back in your 401k or other
retirement accounts because of the yearly 401k limit or
other retirement plan's limit. If you have an IRA, the
contribution limit is very low and it will take a
long time to get back where you were with your 401k before
you took a 401k early withdrawal.
Exceptions to the 401k
early withdrawal penalty
Fortunately there are times when you will
not have to pay the penalty on 401k early withdrawals. Below
are the situations where you will be exempt from having to pay
401k early withdrawal penalty.
The 401k early withdrawal is made upon the
death or disability of the plan participant.
You were age 55 or over and you retired or left
your job when you made the 401k early withdrawal.
You received the 401k withdrawals as part of
"substantially equal payments" over your lifetime
or 72t distribution.
You take a 401k early withdrawal and paid for
medical expenses exceeding 7.5% of your adjusted
The 401k distributions were required by a divorce
decree or separation agreement.