Avoid early withdrawals from your 401(k) plan
A 401(k) plan is designed to help you save money for when you retire.
Sometimes it may be tempting or even unavoidable to withdraw money from the
plan before retirement. But before you do, consider the consequences of taking
an early distribution.
Many 401(k) plans allow you to get an early distribution due to certain events
(listed in the plan) that cause you, your spouse or your dependent(s) to suffer a
financial hardship. For example, some 401(k) plans may allow an early
distribution to pay for:
- medical or funeral expenses,
- tuition and educational expenses, or
- the purchase of a primary residence.
Aside from the obvious consequence of reducing the amount available when you
retire, there are also tax consequences of an early distribution. You generally pay
income tax on distributions from a 401(k) plan. However, if you take an early
distribution, you may also have to pay an additional 10 percent tax unless you:
- are over 59½ years of age, or
- qualify for another exception to the additional10 percent tax.
So, consider the consequences before dipping into your retirement savings.