401K Penalty

The 401k Penalty for early withdrawal is a heavy price to pay, but one many decide they have to. Before you make that decision you should look at exactly what the penalty will be, how it works, and if there is an alternative that will work for you.

The fee is comprised of three parts: federal tax, state tax, and the early withdrawal penalty. The federal tax percentage you will be charged depends on your income bracket. You can look at your last year's income tax papers to find what percentage you were charged then, but be aware that when you withdraw from your 401k that money is now considered income and that may push you into another tax bracket, increasing the percentage you have to pay. The state tax is different in every state, but you can probably find that number on last year's paperwork, too. The early withdrawal 401k penalty is ten percent. Usually when you go to cash out thirty percent is withheld by the company, ten percent for the early withdrawal fee, the rest for taxes. Anything not covered by the withheld money for the taxes you will have to pay when you file your yearly taxes, so it's a good idea to put some aside for that.

Circumstances when you can avoid the 401k Penalty

Under a lot of plans you have the option of taking out 401k loans. These can be up to 50% of your account or $50,000, whichever is less. These have to be paid back within five years or else they are counted as early withdrawals and you have to pay the penalties just as though you'd cashed out in the first place. These loans usually have low interest rates, and the interest you pay goes right back into your account balance.

Under situations of economic hardship such as a situation where you may lose your home/apartment or you have medical bills you can withdraw from your account without fees, but you do still need to pay the money back.

With some plans you can withdraw to pay tuition for college when the classes will further your current career.

If you sign up for a Roth 401k, where the money you have taken from your paycheck is after taxes, there are plans where you can withdraw limited amounts of money over the life of the account.

And, of course, you can withdraw from your 401k penalty free when you are 59 years and 6 months old. It's important to note that if you do not start withdrawing before you are 70 years old you will be penalized.

In Conclusion there are some harsh fees to take care of in order to withdraw from your account- federal taxes, state taxes, and a ten percent fee really add up. If any of the other options work for you, avoid the 401k penalty.