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 The withdrawn funds would be taxed by your employer and considered as ordinary income.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
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