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401k Early Withdrawals

401k Early Withdrawals

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You can make an early withdrawal from your 401k account, but you will definitely lose some money in the process.

The money that you contribute to your 401k is yours, and you can make a full or partial withdrawal of your vested funds at anytime that your plan allows. However, no matter what your age, any funds taken out will be subject to income tax and you will be ultimately taxed according to your income bracket and current tax rates. Remember that large withdrawals may put you into a more expensive tax bracket, and that a mandatory 20% tax withholding is taken out up-front so the cash you wind-up with will be less than the original withdrawal amount.

On top of the taxes, you may also face an early withdrawal penalty if younger than the retirement age (59.5). Currently running at 10%, the penalty can only be avoided in certain hardship cases as provided by law. These include heavy medical expense burden, disability, certain cases involving higher-education expenses, buying or building a first home and some other cases.

As an alternative to 401k early withdrawals, consider 401k rollovers or 401k loans, which allow you to borrow from yourself with all the interest being payed to you into your 401k account.

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