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Calculating 401K Early Withdrawal Penalties
There are times when you don't want to, but you just have to take money out of your 401K despite the early withdrawal penalties. There may be better alternatives in the long run then pulling money out of your retirement account early like taking out a personal loan or even using a credit. But before you make a final decision you need to figure out what type of 401K early withdrawal penalty you are going to face.
To do this first you need to figure out what federal tax rate you are paying. You see once you take money out of the 401k it is considered income and you are going to have to pay income tax on it. Figure out what your tax rate was last year and then apply it to the money you are thinking of taking out. Remember though that the money you take out may actually bump you up to a higher tax bracket.
You also are going to have to take a look at your state income tax rate and apply it to.
Now you also are going to take a 10% hit on the amount you take out of your 401K as your early withdrawal penalty. So if you take out $25,000 for instance you are going to have to pay $2,500 to the government for your early withdrawal penalty.
Most 401K's have a retirement age set at 59 1/2 years old. So if you wait until you are that old you won't take the 10% hit. But if you take out money before then you'll lose 10% on anything you take out of your 401k.
There are a few exceptions to this rule. In some cases you can be exempt from the withdrawal penalty if you paid medical costs over 7.5% of your annual income. Sometimes as a part of divorce settlement court order you can get escape the penalty. I suggest you check with your tax accountant in these type of cases.
But in sum if you take our money from your 401K you can expect to take a brutal 10% hit on your money.
You have to decide whether that is worth it or not. You need to save for retirement. So you must make sure that you have your future in mind and not just present money needs.
There are strategies that you can employ in your 401K to maximize your returns with as little risk as possible and even escape market downturns. For more on this subscribe to my free weekly financial newsletter and get my investment guide for free. It is completely free. To subscribe just click here.