401k Early Withdrawal Penalty

Ah, the 401k early withdrawal penalty. The bane of every 401k plan investor’s existence!

Each and every one of us have Congress and the Tax Reform Act of 1986 to thank for the early withdrawal penalty – which requires us to pay 10% of our hard-earned money to the government when we take money out of our retirement plan if we are younger than 59 ½ (in most cases).

It really is unfortunate, but we have little choice in the matter. Of course, we could choose not to invest our money in a retirement program, but the reality is that saving for retirement would be much more difficult if we didn’t have the tax-deferred advantage that accounts like IRA’s and 401k’s offer us.

So really, it is something that we have to deal with. And it’s something that we (arguably) should deal with.

Retirement plans are just that…plans for retirement. When you save for retirement you shouldn’t be looking into every possible way that you can take money out of it. You should be looking into every possible way to keep money in it. Consider the 10 percent early withdrawal penalty incentive for not touching it.

Let’s take the focus off having to pay the 401k early withdrawal penalty and instead take a look at a few of the reasons for which the early withdrawal penalty doesn’t have to be paid in a 401k plan:

  1. Distributions taken after the attainment of age 59 ½
  2. Distributions taken as a result of death or total and permanent disability of the participant
  3. Distributions made to a participant who has separated from service AND is age 55 or older
  4. Distributions made to pay for medical expenses that exceed 7.5% of your adjusted gross income (see hardship withdrawals)
  5. Distributions made under arrangement 72t, which allows distributions of substantially equal periodic payments that must continue for five years, or until you are 59 1/2 – whichever is sooner
  6. Distributions made due to a Qualified Domestic Relations Order
  7. Corrective distributions resulting from excess deferrals

As always, check with your employer, plan provider, or professional financial advisor for information on your own personal situation.