It is possible to withdraw 401K without any penalty, but that happens only in very rare cases. Here is some information on related aspects of its withdrawal.
No financial guru, government, and employer ever encourages anybody to go for an early 401K withdrawal. The obvious reason being that, a 401K withdrawal is not something that one should experiment around very easily. 401K retirement savings is the money you put aside as your savings for a financially secured future after your retirement years. So, before you proceed for withdrawing from 401K earlier, you need to give it a second thought. Also, there are some strict penalties imposed if you withdraw those hard-earned savings before time.
For your good, the government discourages early 401K withdrawal. To do so, it imposes some strict financial penalties.
- For various types of retirement plans, including 401K, there is a 10% penalty imposed on the total amount of your savings at the time of withdrawal.
- As we all know, 401K savings are exempted from tax, but when you’re taking out your savings before the fixed time, you would be entitled to pay tax on it. The money that will come out of your savings will be called ‘source of income’. Depending on the income bracket your withdrawn amount falls in, you’ll be charged tax.
Early withdrawal brings with it the added burden of a 10% penalty as well as tax, that can cause significant financial loss.
Fortunately, there are some exemptions to the rules. If you don’t have any other option but to withdraw your 401K savings, then here are some cases under which you can be exempted from the penalty.
- In cases of home eviction and foreclosure, there is no penalty.
- 401K withdrawal goes penalty-free if you’re permanently disabled owing to some accident or injury.
- No penalty is charged in case it is for divorce settlement issues and for meeting normal expenses of daily life.
- If your withdrawn funds are named to a beneficiary or your estate after your death, then you are exempted from penalty.
- If you invest the savings in some other retirement planning schemes within 60 days of withdrawal, you will be exempted.
- If your medical debts have exceeded 7.5% of your adjusted gross income, no penalty is charged.
- You have to pay the medical insurance money due to a 12-week-long unemployment period.
- For first-time home buyers, the penalty for early withdrawal is neglected on the first $10,000, but the penalty has to be paid for the withdrawal for later amounts.
One of the most confusing cases for getting a penalty-free 401K withdrawal is if your employer has terminated you from your job, and you’re not entitled any benefits from it. In this case, if you’re under 59½ years of age, you would be charged 20% mandatory withholding cut taxes and 10% penalty charge (If you don’t fall in any of the exemption rules). Similarly, if you’re above 59½ years but less than 70, you would be charged a 20% withholding tax, or you can leave the amount to your employer so that you can take it whenever you need it in the future. You can also have the option to rollover the amount into an IRA account or get a solo 401K withdrawal.