​401K Penalties Early Withdrawal Can Cost You

Staff Reporter
May. 25, 2014

401k Penalties Early Withdrawal - If you withdrawal from your 401k account, you will endure stiff penalties and taxes. This is why it’s very important not to touch your retirement plan until you need it. However, there are ways to take out a loan against your savings so that you don’t have to remove the funds.

Many people are looking at their 401k as a way to pay off credit cards or in life emergencies. It’s never a good idea to take any withdrawal from your retirement. There are other options, such as a home equity loan, that can be much cheaper.

The first thing you should determine is what federal tax rate you are paying. It is considered income once you take the money out of your 401k. The federal income tax rate is between 15 percent to 35 percent.

You may want to check your previous IRS tax return. In addition, make sure the withdrawal doesn’t put you in a new tax bracket, as it will count towards higher income. It is a big mistake people often make.

If you live in a state that has income taxes, you will be paying more for your 401k early withdrawal. For example, let’s say you are taking $30,000 to buy a new car and are in a 20 percent tax bracket in a state with 5 percent income tax. If you take out $30,000, it will only net you $20,000. You lose $3000 for the penalty, $6000 for the federal income tax and $1000 for the state income tax.

However, you can take a loan against your 401k for certain things. Loan money is usually limited to half the value of your account up to $50,000 with a timeframe of 5 years to repay the money. You just may be able to avoid all of the penalties.

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