Most people know about 401k retirement plans. They are an easy method of putting aside money for retirement, with favorable tax breaks. Savings are only taxed when money is withdrawn. 401k plans are quite useful in helping people save effectively, but they are not in place for anything other than retirement. This means that any need for a withdrawal of money from your 401k before you are a certain age will likely result in steep penalties or at least a lot of red tape in order to access the funds.
The standard withdrawal from a 401k retirement plan occurs when an individual has reached the age of 59 and a half or over. Once this milestone has been reached, the government will not impose an early withdrawal penalty of ten percent on whatever you take out. The 401k accounts are there to provide Americans with money when they retire, and the tax breaks that are involved are only available for those who use the account for retirement purposes. If money is withdrawn earlier, then there will be penalties.
A 401k retirement plan can build up a significant amount of money, especially when your employer matches your 401k contributions on a regular basis. But in some cases a person may run into financial difficulties that can only be solved with a withdrawal from their 401k account. In order to avoid the steep penalty of ten percent in addition to other taxes, the government has set up a system of 401k hardship withdrawals. In certain situations, namely that you are potentially going to lose your property or require all your current and anticipated income to pay for necessary living expenses, you may be able to receive an early 401k withdrawal due to a specific hardship.
There are a few other withdrawals that can be made from your 401k investment account before you actually retire that will not necessarily incur penalties. Most of these situations are special exceptions, such as when you die and the money from your 401k is distributed to your beneficiaries or your estate; when you have medical expenses that are more than 7.5 percent of your gross income; or when distributions are made to the IRS to pay for any levy that may be on the plan.
As you can see there are a few exceptions that have been put in place to help taxpayers take advantage of the money that is theirs but is not accessible until a later period in their life. The way the 401k retirement system is setup there are usually always taxes that must be paid when money is withdrawn from a 401k account, but whether you must pay any penalties will depend on your situation. If you don’t need the money until after you retire, then you will probably not have problems; if you require the money earlier, you will have to see what exceptions you may qualify for.
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