How To Carry Out A 401k Early Withdrawal

A situation may arise in your life whereby a 401k early withdrawal appears to be an option worth considering, for example you may need access to funds to support yourself and your family. Understand that if you were to withdraw your money at a time far sooner then what was expected, you will be liable for various penalties. If you feel that you have no other option, take a moment to read the following advice on how to perform an early 401k withdrawal.

When taking the money out of a 401k account prior to your retirement date, you will be required by law to pay income tax on the capital. This would be calculated at your current tax rate, if you are not sure exactly how much tax this would entail, consult a tax advisor. If the funds are classified as income the rate may be as high as 28%, this would take a huge chunk out of the money you have access to. Understand that there may be a requirement to pay both federal and state taxes.

It may be the case that your 401k plan has a special clause whereby an early withdrawal is only allowed you are undergoing serious financial hardship. This could include situations that involved emergency medical payments, mortgage payments to avoid foreclosure, funeral expenses, and sometimes college bills for a son, daughter, or spouse. It is vital that before you attempt a withdrawal you are clear on the conditions that would govern the release of the funds.

Alongside paying a large income tax bill, you will also be presented with a ten per cent penalty charge from the account provider if you perform an early withdrawal of your 401k. For this reason it is essential that you analyse in detail whether or not you should proceed with the withdrawal.

401k Early Withdrawal

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The penalty would be levelled before any tax bill is paid, therefore this charge can be a not inconsiderable sum, for example if you have built up a nest egg of $200,000 you will be penalized $20,000 by taking this action.

It is worth noting that there may also be a strict set of rules in place that govern how much you can actually withdraw form your 401k account at an early stage. You should contact the plan’s provider or your employer’s HR department for the latest information in this regard.

Prior to going ahead with a withdrawal it is worth exploring whether there are other options that would not result in such a loss financially. For example, there are 401k loans that can be availed that have favorable interest rates, this is a possibility that may be preferable considering the penalty charge and tax bills that would need to be paid upon removing your 401k capital. Another option would be a 401k rollover.

It is vital that whatever decision you make, it is only done after analysing various factors and having consulted your 401k plan’s provider. To start with, visit the website of the provider as here you can find exact details of the penalties and charges relating to an early withdrawal.


Undertaking A 401k Hardship Withdrawal Process

A 401k plan is a type of retirement investment account that is offered by an employer to help employees monetarily when they reach retirement age. There is an option of making an early withdrawal of the capital under certain circumstances. If you are currently experiencing great financial difficulty due to an unforeseen situation, you may be allowed to initiate a 401k hardship withdrawal. This is permitted if you have no real option open to you apart from drawing on the investment funds to get through a period of monetary difficulty.

If you believe that this is a decision that you will have to consider seriously, first of all you need to make certain that your financial hardship would meet the qualification criteria. Understand that the provider of your 401k plan would have strict rules in place that govern the situations when a hardship withdrawal is permitted.

Any of the following predicaments and outlay can be a basis for a hardship withdrawal – emergency medical expenses, college expenses for a dependent, funeral expenses, and when extra capital is necessary to prevent a foreclosure on your main place of residence.

You will need to find out whether a Proof of Need document must be submitted to your current employer in order to be eligible for a withdrawal on the basis of hardship. If this is the case, speak to your HR manager to be made aware of the documents that would have to be provided. If your plan is termed as being “self-certification” it is unlikely that you would be asked to present a Proof of Need.

Before undertaking the withdrawal be clear on whether the funds that would be made available are large enough to meet your financial expenses. Removing capital to cover an economic hardship has strict rules which govern its activity. It is often stipulated that you must first explore other options to meet your hardship requirements prior to cashing out the 401k investment plan.

It should be noted that any early withdrawal from a 401k policy would result in tax liability. For this reason you should be clear on your tax bracket and have an accurate assessment of the amount of taxes that would be required to be paid. Under certain situations you may end up losing as much as thirty to forty per cent of the collateral due to federal and state tax laws.

Once you have carried out an early withdrawal and have met you financial hardship obligations you can then report the amount you have used on the following year’s tax return as gross income. If you are under any confusion as to how to do this you should seek advice from an experienced tax advisor.

Alongside the above mentioned rules and conditions, you will not be allowed to make further contributions to a 401k plan for a minimum of six months upon receiving the withdrawal money. This aspect of the policy is in place to deter applicants from considering an early withdrawal. Under the same rule no employer matching contributions will be given for the same amount of time.

Published by

Michael Brown

Michael Brown

Retirement planning expert and rollover IRA to gold adviser.