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Should You Make Early Withdrawals from Your 401(k)?

Should You Make Early Withdrawals from Your 401(k)

Your 401(k) is a tax-advantaged retirement account built to help you save more for retirement. Contributions can lower your taxable income, and money inside your 401(k) grows tax-deferred. Withdrawals are subject to income tax. To encourage people to keep money in their 401(k)s until retirement, the IRS may charge a 10% early withdrawal penalty on withdrawals made before age 59 ½. 

For the most part, it is unwise to withdraw money from your 401(k) before you’re ready to retire. Any funds you take out are money that is no longer working toward your retirement goals.

On the other hand, sometimes financial necessity or early retirement plans require you to make early withdrawals. To decide when to dip into your 401(k) and when to hold off, you need to consider several factors: the penalties and tax consequences of the withdrawal, the potential tax-advantaged growth you’re giving up, and your individual financial needs.

Early withdrawal options

The tax code provides for several exceptions to the 10% early withdrawal penalty to accommodate early retirees and people in need. That said, even without the penalty, early withdrawals from your 401(k) can limit your ability to grow your nest egg. That’s why you shouldn’t make them unless absolutely necessary. If you must, here are some options to consider:

Tapping into your 401(k) before you reach age 59 ½ should only be something you consider as a last resort after you’ve exhausted your other options. A financial advisor can help you choose a withdrawal strategy that fits your situation and develop a plan to keep you on track for retirement.

SOURCES:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-hardship-distributions
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions
https://www.cnbc.com/2020/04/20/tapping-your-401k-is-now-the-right-time-to-do-it.html
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
https://www.forbes.com/advisor/retirement/rule-of-55-retirement/
https://www.forbes.com/advisor/retirement/rule-72t-early-withdrawals-sepps/
https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans

Material prepared by Oechsli a third party non-affiliated with Raymond James.

Any opinions are those of Steven Bayardelle or The Wang Group and not necessarily those of RJA or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. You should discuss any tax or legal matters with the appropriate professional.

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