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Early 401k Withdrawals

Taking out money from your 401k early can hurt later on, but if you need the money today then you do have a couple 401k withdrawal options that allow you to do it.

The first option is to get out a simple withdraw. If you have some sort of hardship and need to take money out from your 401k you are eligible to do so. However the 401k withdrawal rules do make you pay a 10% early withdrawal penalty on all money taken out. In addition to that there are also taxes that you will have to pay on the money.

The second option is to take out a loan. The 401k loan rules allow you to withdraw money from your account without having to pay the penalty or taxes; the catch is you have to pay it back with interest.

So, which way is better? Generally taking out a loan will normally be a smarter decision then withdrawing the money early. This way you avoid paying more taxes and you do not hurt your long term savings.

Even so there are some times when taking out a loan does not make sense and that it is easier to just take out a simple withdraw. If you are having trouble paying your bills now then taking out a loan will only add onto your bills, so it will probably not be the best solution.

Also if you plan on taking out a loan from your 401k for a long time period it may not work as well. This is because the majority of plans will either limit the amount you can invest while you have a loan out or stop you from investing more money into your 401k altogether. So taking out a loan could hurt your future saving efforts.

They both have their drawbacks, so if you need to get money out of your 401k now you should look at both strategies and see which one will be the lesser of the two evils.

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