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401K Early Withdrawal Penalties
It is always tempting to delve in your 401k to withdraw money when you face a money crunch. However, you should be warned that might be liable to pay 401k early withdrawal penalties. |
If you withdraw money from your 401k retirement plan before you turn 59-1/2, you may have to pay an early distribution penalty of 10 percent. There is more to 401k early withdrawal penalties that what meets the eye. The taxable amount (the amount that you withdraw) is added to your regular taxable income. The 10 percent early withdrawal penalty is in addition to your regular income tax.
It is called 401k early withdrawal penalty because it is similar to the penalty banks charge you when you liquidate a savings account early. However, you do not have to pay the 401k early withdrawal penalties if you meet certain criteria. But there is not way of avoiding the inclusion of your early withdrawal into your taxable income.
There are certain situations when IRS might waive off the 10 percent 401k early withdrawal penalties.
- If your un-reimbursed medical expenses exceed 7.5 percent of your income and you made the withdrawal to pay for those expenses.
- You have separate from service and your age at the time of separation was at least 55 years.
- There is a Qualified Domestic Relations Order (QDRO) from the court that commands you to give funds from your retirement plan to your child, dependent or former spouse.
- Your plan falls under the purview of IRS rule 72 (t)
- You are permanently disabled. Here you would have to furnish information proving that you are totally and permanently disabled.
- You die and your beneficiary gets the money in your 401k plan
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