401k is an employer-sponsored savings plan for retired people. The plan seeks to help them save enough so that they can meet up with life expectations and their lifestyle after retirement. There’s the possibility for the money to be tax-deferred, and this includes the contributions of the employer, even as they focus on their long-term goal for retirement.
Life can happen to anyone, and individual goals are prone to shift regularly. You are probably wondering why do i have trouble spending money and you should remove your money from 401k before retirement sets in. The fact is that you should remove your money before retirement. If you’re also wondering how you can efficiently make a withdrawal from your 401k account, continue reading to find out more in this article.
Making an Early Withdrawal from 401k
One of the costly decisions that you might have to make before retirement is to make an early withdrawal from 401k. Under normal circumstances, you wouldn’t need the distribution unless you have fully decided to leave your current employment and advance on with the next phase of your life, and in this case, we are referring to retirement. In many cases, retirement usually comes at the age of 59.5. However, there are also instances where it could be 55.
It’s important to note that the retirement age is different from the age when you can claim Medicare and Social Security. Those are not just arbitrary numbers that anyone can make up. They are actually clearly stated by the IRS, and they decide when you can start making withdrawals from your retirement money. When they do this, they also won’t need to pay any additional penalty fee, which is usually 10%. Another thing to note is that there may be differences in the rules, especially for individual employment status.
A key warning to have in mind is that your financial plan could face many future risks with these expectations. Also, gaining access to your retirement funds may not be a prudent decision to make. You’ll have to keep in mind the 10% penalty, as well as the paying income taxes, that is, on the amount you take out from your income. You might also be potentially selling your holdings, especially in cases where the market goes down or no longer contributes to the 401k plan. All of these are some of the key things to always have in mind if you decide to make an early withdrawal from a 401k.