Most people save for retirement by contributing to a 401(k) plans. A typical 401(k) lets employees save 15% of their salary and increase their savings by having their employer match their 15% each month. But it does not end there, the employee may also have the freedom to choose from several funds where they can invest this amount.
Withdrawing Money From The 401(k)
Even though there are clear penalties implied, it does little to stop many tax payers from tapping into their plans prior to retirement. There is a way to cash part or your entire 401(k) plan before you retire without having to incur any penalties.
You have to be at least 59 and half years old for this, go through some sort of financial hardship, or have a disability. In addition to this, a person can withdraw from the plan, of their employer has decided to discontinue contribution to the 401(k) and has not determined another plan.
These withdrawals are taxable, and may also be liable for income tax on early withdrawal. A person can only be eligible for the cashing out of 401(k) if they can prove their immediate and heavy financial hardship and the amount that they want to withdraw can counter it. This could be medical expenses, tuition, avoiding eviction etc. However the distribution amount cannot exceed the amount that the employee has contributed under the plan.
If you cash out the plan too early or without reasonable cause, you will be subjected to a 10% excise tax. And that is just for starters. There is the standard income tax that is implied on someone who raids their 401(k) plan. Plus if all that was not enough, someone who bites off a chunk off their retirement account will most likely have to work longer.
Cashing out the money is not the only way one can withdraw money from the 401(k). Many plans allow employees to take loans from their 401(k) to be repaid. Certain loans let you take loans, these loans can be repaid at pre defined interest and with after tax funds. The interest that you pay then becomes part of 401(k)’s balance. The best part about this process is that you are actually just paying yourself back.
The loans that are permitted let a taxpayer borrow up to the limit of 50% of the account balance. The borrower must also repeat the loan in five years time.
All 401(k) account holders need to do their homework on their choices when they decide to switch jobs. A good idea would be to reach out to an experienced accountant in South Orlando and take their advice for your unique financial situation.
If you need more information about our Orlando accounting and tax services, please contact us at 407-502-2400. Freedomtax Accounting’s staff has been providing honest accounting services and tax services for 15 years. Our Orlando accounting and tax firm has its main offices in Kissimmee, FL. Our services are provided nationwide, but mainly in the Central Florida market to areas like Orlando, South Orlando, Kissimmee, St. Cloud, Poinciana, Clermont, Davenport, Hunters Creek, Lake Nona, Celebration, Winter Park, Windermere, Dr. Phillips, Maitland, Altamonte Springs, Winter Garden, Ocoee, Apopka, Belle Isle, Edgewood, and Oakland FL. Our tax accountants and IRS enrolled agents (irs ea) specialize in corporate accounting and bookkeeping, tax services, tax preparation, back taxes help, tax debt relief, tax resolution, tax planning, itin number, incorporations, and non profit 501c3 tax exempt.