Tags: Retirement | 401k | withdrawing | drawbacks

3 Drawbacks of Withdrawing Money From 401(K)

By    |   Monday, 31 Aug 2015 02:09 AM

The 401(k) is a retirement plan that, like other retirement plans, is best left untouched until you are at retirement age.

Only about half of Americans work at companies that offer 401(k) retirement savings plans, Forbes reported. These plans let employees invest part of their paycheck before taxes. That money can grow tax free until retirement. Then the money will be taxed as income when it is paid out. Many companies offer the added benefit and incentive to employees of matching money the employee saves. This is like getting a small raise.

There are many circumstances in which a saver can take money out of a 401(k) before retirement, taking a personal loan on money they invested, or paying for certain large expenses, like medical bills, education or buying a house. However, there are several drawbacks to withdrawing money from a 401(k).

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1. The IRS Will Take a Big Chunk
Money taken early from a 401(k) gets hit with a double whammy tax burden. The IRS can take 10 percent additional tax as a penalty for taking that money before retirement. The money will also be taxed as income.

2. The Money is Not Growing
Withdrawals from a 401(k) before age 59 ½ are going to be more costly than you expect, CNN Money said. Aside from the early withdrawal penalties and extra taxes, there is a lost opportunity to have that money grow into the nest egg you will need later in life.

3. There are Limits on Loan Payback Times
Many employers will allow an employee to borrow money out of their 401(k) as a low interest loan. However, most plans have a very short pay-back window. In most cases, if you leave your employment for any reason, that money is due immediately, Bankrate said.

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The 401(k) is a retirement plan that, like other retirement plans, is best left untouched until you are at retirement age.
401k, withdrawing, drawbacks
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2015-09-31
Monday, 31 Aug 2015 02:09 AM
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