Early withdrawals from your 401k funds can result in hefty penalties. Under some circumstances the IRS allows penalty- free withdrawals. Read on to find out more about 401k withdrawals!
What Are the Penalties of Early 401k Withdrawals?
Due to hardships, loss of a job or other unplanned circumstances, you might be forced to withdraw funds early. Some consequences to early 401k withdrawals include:
- The IRS is required to withhold 20% of a 401k early withdrawal for taxes.
- If you withdraw money from you 401k account before the age of 59 1/2, the IRS can put a 10% penalty when you are filing your tax return.
- The earlier you withdraw money from your 401k the less money you will have in your future retirement
Penalty Free Withdrawals
1. Coronavirus Related Withdrawals
The recently passed CARES Act 2020 allows, under special circumstances, early 401k withdrawals penalty free. The 10% penalty the IRS normally would collect for early withdrawals are being exempted for coronavirus-related distributions up to $100,000.
2. First-Time Home Purchase
For first-time home buyers or new builds, you are allowed to withdraw up to $10,000 out of your 401k penalty free. If you are married, your spouse is allowed to withdraw the same amount. The penalty free exception applies here due to “benefit of your family” circumstances.
Some 401k plans will allow education expenses to fall under hardship withdrawals. You are qualified to take early 401k withdrawals for higher education expenses, including tuition, fees, textbooks, and supplies. This rule exception allows you to use it towards going back to graduate school. Or, you can apply it to your spouse and children.
4. Medical Expenses
Unexpected medical expenses can be a financial burden, but if the expenses are higher than 10% of your adjusted gross income for that year you qualify for early 401k withdrawals without incurred penalties.
Even though there are exceptions to early 401k withdrawals penalty-free, it’s recommended not to withdraw from your retirement funds until you retire, in order to have enough savings when retiring.
If you have any questions about your 401k or if you’re wondering if your unique circumstance qualifies you for an early withdrawal, contact the financial experts at Satty, Levine & Ciacco, CPAs, P.C. We can guide you through the process. Visit our website today to get started!