Withdrawing funds from your 401k retirement pension fund before attaining age 59 1/2 will attract taxes and penalties because the government aims at securing the funds for your future retirement needs. You should also bear in mind that tax does not apply to your savings at the time of deduction, so if you withdraw early, you have to pay the deferred taxes plus penalties.
Our financial advisors at The Financial Architects will guide you on how much is taxed on 401k early withdrawal and help you make a sound decision.
What is A 401k Plan?
A 401k plan is an investment and savings scheme where you make regular contributions for your retirement. The 401k plan has two options; one is where you solely make contributions to the policy. And the second option is where your employer matches your contributions. The amount of money from your income going into the scheme is not taxed. Also, what is earned after investing your 401K isn’t taxed. The plan helps you save for the future as the contributions are withdrawn from your paycheck automatically into the retirement account.
Retirement Scheme Regulations
Usually, the person who contributes to the scheme is only allowed to access the funds after they attain age 59 1/2. However, there are some exceptions where you can be allowed to have your savings at the age of 55 years, such as when you leave your employer, lose your job, or when working in the public service.
Employees who contribute the full amount to their retirement plan accounts are entitled to get the total amount when they chose to opt-out early. But if your employer was matching your contributions, then the employer's share is retained until you attain the legal age of 59 ½ years.
The 401k plan allows you to take out money from the fund if you become disabled. Also, in case you pass away, your beneficiaries can access the funds.
What Penalties Do You Pay For Accessing Funds Early?
Early withdrawal of funds from a retirement scheme attracts taxes and penalties.
Firstly, the amount you get attracts a higher income tax than what you would pay later on if you wait until retirement.
Secondly, you’ll have to pay an extra 10 percent excise penalty on funds withdrawn. For instance, if the income tax is 20 percent, adding the 10 percent penalty increases your total deduction charge to 30 percent. And that's quite a considerable sum of money to lose from your savings.
How Do You Withdraw Funds Penalty-Free?
The following are circumstances under which you can withdraw funds from a 401k without the 10 percent penalty:
- You can take funds from your account penalty-free if you intend to use them for higher education purposes. It could be for tuition or books.
- Exemption from the penalty applies when buying a primary residence.
- Medical emergencies are considered as financial hardship cases which qualifies you to get the penalty waiver.
- Taking a loan against your retirement scheme savings guarantees you a tax break too.
Get The Best Advice
If you want more information about how much is taxed on 401k early withdrawal, get in touch with us today on (888)350-5396. One of our financial experts will advise you accordingly.