401k Withdrawals And The Government Rules

401k is an excellent savings plan that helps you to save for your life post the retirement period. An account is created where you can save your pre-tax dollars safely. This savings comes into great use during challenging economic times and help you pay your bills and attend to your financial commitments without much delay.

Once you choose to withdraw your 401K funds when you are below the age of 59.5 years, you would have to pay a heavy tax amount. The withdrawn funds would be taxed by your employer and considered as ordinary income. Along with this, you need to pay an additional 10 percent penalty though it may not be immediately deducted from your account on withdrawal. Hence, you need to think twice before opting for the withdrawal options from your 401K plan.

However, there are 5 special circumstances which would allow early withdrawal of 401K plans and they are:

Case of sudden large emergency medical expenses
Prevention of foreclosure of homes
Expenses related to buying primary residence
Expenses related to cremation formalities on the death of parents, spouse, children or dependants
Post secondary education for children, spouse or the 401K account holder

However, this does not mean that under the above special circumstances you would not be penalized. 401K plans will allow the holder to withdraw funds only if this is the last resort for obtaining funds and the other finance gaining possibilities like taking loans are exhausted. There are pre-determined limits as to how much you can withdraw from the 401K plan account.

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