How to do a 401k Early Withdrawal

For whatever reason, you may have to do a 401k withdrawal to get cash to support your needs. This can be a difficult task, and you will incur a lot of penalties for having to perform a withdrawal early before your planned retirement date. Please read the steps below in order to know the rules and the methods to perform an early withdrawal from your 401k plan.

Difficulty: Moderate

Instructions

1. Remember that since you've contributed money to your 401k plan tax free, when you withdraw (even if you were retired already), you will have to pay income taxes on your withdrawal. You will be taxed at your current tax rate when you do your withdrawal.

2. Many existing 401k plans have a rule that says you cannot do an early withdrawal unless you are undergoing any hardships. This includes any need for paying medical expenses, paying a mortgage to avoid foreclosure (on a primary residence only), to pay for college, or cover funeral expenses. Please check with your 401k provider or your company website for more information before proceeding, just to make sure an early withdrawal is possible.

3. In addition to the income taxes that you will have to pay (from step #1), you will incur a 10% penalty for performing an early withdrawal from your 401k plan. You have to really access your situation and make sure that the 10% penalty is worth it to you. If you have $100,000 in your account, for example, you will have to pay a $10,000 penalty. The penalty comes off the top, before the other taxes are taken off. This is a lot of money to be wasting for an early withdrawal, so again, please access your situation before making any fast decisions.

4. Furthermore, your employer may have a strict set of rules as far as how much you may be able to take out for an early withdrawal from your 401k plan. Contact your plan provider or the human resources department at your work to get all of the detailed information about an early withdrawal.

5. To perform an early withdrawal, you should first contact your plan provider and tell them exactly what you want to do. They will go over the same penalties mentioned above, and have a better understanding of exactly how much you will be losing to taxes and the penalties.

6. A lot of the process can be done online through your plan provider's website. Simple look for an area of your account that says withdrawal or early plan withdrawal. If there is no website or you cannot locate this particular section, please contact your human resources director at work and he or she will be happy to help you, especially if you are in need.

Tips & Warnings

• An alternative to taking an early withdrawal to your 401k plan is to take a loan against your 401k account instead. Please check with your plan provider or human resources department for more information about 401k loans to yourself.

[heatherschulte]

on 12/4/2008 Good Information!