11.29.2011 / What You Should Know About 401(k) Withdrawals

Tough economic times often increase the number of people tapping into their 401k retirement plans before they reach 59 1/2. This is the age at which 401k withdrawals are allowed.

"Before you take an early 401k withdrawal you should be aware of the penalties that will be incurred"

Consumers facing foreclosures, unexpected medical expenses or increasing college tuition for their children are beginning to consider withdrawing from their retirement accounts to pay for these immediate expenses. However, every 401(k) withdrawal will affect your future retirement and your taxes. Before you take an early 401(k) withdrawal, you should be aware of the penalties that will be incurred.

Typically, a withdrawal from your 401(k) account cannot be made unless you reach the age of 59 ½, you die or become disabled or if the plan is terminated and no successor defined contribution plan is established or maintained by your employer, according to the Internal Revenue Service. If a distribution is made from your 401(k) account before you reach the age of 59 ½, you may be subject to income tax and an additional 10% tax on the distribution. You will have to file Form 5329 to report the tax on any early distributions.

As an alternative to withdrawing from your 401(k) account, consider taking out a 401(k) loan. Most plans allow you to borrow up to half of the vested balance, up to $50,000. The loan must be repaid within five years, unless you are using the loan to buy a home. Keep in mind that payments made on a 401(k) loan are not made with pretax dollars like 401(k) contributions. When you withdraw the money during retirement, you will have to pay taxes on the funds.

You should also consider other loan sources before borrowing from your 401(k) account. Borrowing from your plan may have a negative impact on the earnings of the account and will reduce the money you will have available for your retirement. First National Bank offers a variety of loan accounts with great rates. First National Bank also offers a variety of retirement accounts to help you plan for your future.

Posted at 11:04 AM | Permalink
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