Early 401(k) Distribution
Financial hardships can come out of nowhere: an unforeseen medical emergency, a natural disaster, an unexpected house repair, or loss of a job can jostle even those most well-prepared financially. During this setback, it may be tempting to dip into your retirement savings. But first it is necessary to understand the true costs of taking an early 401(k) distribution as well as possible alternatives to help get you through lean times.
Retirement funds housed in a 401(k) are different from other forms of savings funds, and there are many fees and tax penalties that exist to discourage you from withdrawing from your account.
Behind on debt payments? Getting debt help through a nonprofit financial advisor such as CreditGUARD can help make a stressful time a little easier knowing your 401(k) isn’t the only option to get back on track financially.
Penalties for Early Distribution
Participants in retirement plans pay into most plans on a pre-tax basis, getting the benefit of deferring taxes until they become 59.5 years-of-age with the benefit that personal income tax rates are likely to be lower than during peak working years. Additionally, the IRS imposes a penalty and enforces income taxes on any distributions before this age to discourage the liquidation of retirement accounts and help boost savings rates. So if you are considering withdrawing funds from your 401(k) earlier than 59.5 years-of-age you have a few things to consider. Not only will you end up with significantly less money than you withdrew from your accounts due to fees and penalties, but you will also lose out on the amount of future compounded returns on the balance of your retirement account you’ve spent all those years building up.
401(k) plans have many benefits that should be considered before taking an early distribution. More than just a savings account, your employer often matches your savings, which means that if you withdraw early, you not only lose money on fees and penalties but also lose out on saving double. Retirement savings accounts contributions are tax-deductible and the money you contribute doesn’t count toward your gross income for the year, giving you two tax breaks come tax season. Most importantly, the money you’re saving in your 401(k) accrues compound interest. This means that your earnings are put back into your account so you earn interest on your original principal plus interest. In the short term, the gains do not appear significant. However, in the long terms, you will see exponential results.
Obviously being in debt isn’t ideal. But neither is sacrificing a big piece of your nest egg. If you’re in a situation where late debt payments have creditors calling, contact CreditGUARD today to learn how we can help you save, stop those calls and make just one easy monthly payment. Call us at 800-500-6489 now to learn more!