Stock Investing Strategies

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Why Avoid Taking Early 401k Withdraws

There might be a time when you want or need to get money out from a 401k prematurely. But remember that if you do you are only hurting your future. If you are in one of those situations where you need to take money out early you can always try to take out as little as possible to avoid the terrible side effects.

The 401k withdrawal rules say that if you want to take out an early withdraw you will have to pay both taxes and the early withdraw penalty of 10%. If you are in say the 28% tax bracket and want to get out some money for today, then you will be charged with a 38% fee on any money you do take out.

1/3 of the money that is takes out simply vanishes. This could cause you to need to take out even more money to get the amount you need and that could mean even bigger losses for your retirement.

What most people do not realize when they take money out early is how much it really can add up because of interest. If you get out $10,000 today that does not mean that you will have $10,000 less in the future. Instead it could mean that you are hurting yourself even more then you would think.

Let us take an example to show you what I mean. Say your investment makes 10% a year and you plan on letting it sit in your retirement account for 20 years. After 20 years $10,000 would be worth $67,274. It can be pretty interesting to think about how much these two figure differ just because of the interest in an account.

Also there is a maximum 401k contribution That all plans have. This means if you are already depositing the maximum amount you can’t just add a little bit more each month to make up for it.

Generally getting out a 401k withdrawal prematurely is normally not a very wise decision. But there may be instances when it is just the only choice availiable to you. In that case taking out as little as you can may be the best alternative.

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