Daniel Laure, CFP®, MBA, RICP®
November 17, 2021
Your 401(k) is a tax-advantaged retirement account built to help you save more for retirement. Contributions can lower your taxable income, and money inside your 401(k) grows tax-deferred. Withdrawals are subject to income tax. To encourage people to keep money in their 401(k)s until retirement, the IRS may charge a 10% early withdrawal penalty on withdrawals made before age 59 ½.
For the most part, it is unwise to withdraw money from your 401(k) before you’re ready to retire. Any funds you take out are money that is no longer working toward your retirement goals.
On the other hand, sometimes financial necessity or early retirement plans require you to make early withdrawals. To decide when to dip into your 401(k) and when to hold off, you need to consider several factors: the penalties and tax consequences of the withdrawal, the potential tax-advantaged growth you’re giving up, and your individual financial needs.
Early withdrawal options
The tax code provides for several exceptions to the 10% early withdrawal penalty to accommodate early retirees and people in need. That said, even without the penalty, early withdrawals from your 401(k) can limit your ability to grow your nest egg. That’s why you shouldn’t make them unless absolutely necessary. If you must, here are some options to consider:
Tapping into your 401(k) before you reach age 59 ½ should only be something you consider as a last resort after you’ve exhausted your other options. A financial advisor can help you choose a withdrawal strategy that fits your situation and develop a plan to keep you on track for retirement.
SOURCES:
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-hardship-distributions
https://www.cnbc.com/2020/04/20/tapping-your-401k-is-now-the-right-time-to-do-it.html
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
https://www.forbes.com/advisor/retirement/rule-of-55-retirement/
https://www.forbes.com/advisor/retirement/rule-72t-early-withdrawals-sepps/
https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans
This blog post is written by an unaffiliated third-party, and as such, the opinions and views expressed are not necessarily those of Visionary Wealth Advisors. This material is intended for general information only and should not be construed as personalized investment, legal, or tax advice. The information is based on sources believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Statements made in this blog may be subject to change depending on revisions to the tax code, statutes, regulations, or government policy. Please consult your accountant, attorney, or financial advisor prior to engaging in any legal, investment, or tax strategy.