What happens if you withdraw the money from your 401K in advance?
If you quit your job or are going through a difficult financial situation, the temptation to withdraw money from your 401K account is high and growing every day. This article will help you decide if withdrawing your money is a good option.
The 401k is a retirement account sponsored by the employer. In this account, your employer reduces a portion of your weekly check money and deposits it in an account on your behalf within the plan. Usually, when you quit your job, this account is transferred to your new employer or you can also be transferred to an individual retirement account (IRA). Unlike checking and savings accounts, in which you can withdraw money without any penalty, withdrawing your money from your 401K retirement account before time brings penalties.
When can you withdraw money from 401k without penalty?
After 59 and a half years of age. If you withdraw the money before this time you will incur penalties. The only way in which you can withdraw money without incurring penalties is when you show the IRS that you need the money due to an extreme situation like: cover medical expenses, funeral expenses, buy a house, to avoid the seizure of your property and to pay off debts from the university. If you, despite not going through these circumstances, decide to withdraw the money from the account, you will have to pay in addition to the taxes a penalty of 10% on the total amount of money you have taken out.
Do you have to pay taxes if you decide to take out the 401 (k) money?
The IRS does not tax your traditional retirement plan as long as the money is kept in the account. If the money is withdrawn, no matter how much you withdraw or your age, you must pay taxes on it. The amount withdrawn must be reported as an income in the year in which the money is withdrawn, and in many cases, may cause the person to be placed at a higher tax level. So be prepared to work on a payment plan with the IRS.
Are there exceptions to avoid penalties?
Yes, some of the exceptions are:
- He left his job voluntarily or involuntarily after 55 years of age.
- Your medical expenses exceeded 7 ½% of your income
- The court ordered that the money be given to his ex-wife or dependent
- He left his job and established a special program to withdraw money from his account (Section 72).
- It was disabled
What happens if all 401 (k) money is not withdrawn?
If you do not withdraw all the funds from your retirement plan, and if you wish to continue contributing to the plan, there is always a waiting period of usually six months before you can continue to make contributions.
Understanding the structure and penalties of a 401 (k) is not an easy task, so it is advisable to consult with a qualified accountant, who will help you understand the details of this plan so that you can make a more accurate decision. If you want more guidance on the subject of this article, please contact us at (201)345-5252 or make an appointment by clicking on the following link