Dean Vagnozzi established his financial advisory firm A Better Financial Plan with the aim of educating the public on investment alternatives to traditional options such as the stock market or employer-sponsored 401(k)s. The restrictions and fees associated with 401(k) withdrawals are key reasons Dean Vagnozzi steers his clients away from investing in a 401(k) account.
401(k)s generally do not allow employees to withdraw from their accounts before they reach 59 and a half years old without penalty. However, there are very specific situations where an early withdrawal may be permitted. For example, costs associated with medical bills, primary residence purchase or repair, and college tuition may be covered with a hardship withdrawal. These withdrawals incur a 10 percent penalty and are taxed as regular income. This means that account holders will have to take out much more than their expenses in order to cover these additional fees.
Another option is a 401(k) loan, which some plans allow. While 401(k) loans are not taxable within the first five years, they can set the account holder back in their retirement savings goals. This is because while the account was funded with pre-tax income, the loan plus interest accrued must be repaid with after-tax earnings. For this reason, repaying the loan may add up to nearly 25 percent more than the amount deposited in the first place. Also, if the borrower leaves the company or doesn’t pay the loan within the specified time frame, it will automatically be considered a withdrawal and incur taxes and penalties.
401(k)s generally do not allow employees to withdraw from their accounts before they reach 59 and a half years old without penalty. However, there are very specific situations where an early withdrawal may be permitted. For example, costs associated with medical bills, primary residence purchase or repair, and college tuition may be covered with a hardship withdrawal. These withdrawals incur a 10 percent penalty and are taxed as regular income. This means that account holders will have to take out much more than their expenses in order to cover these additional fees.
Another option is a 401(k) loan, which some plans allow. While 401(k) loans are not taxable within the first five years, they can set the account holder back in their retirement savings goals. This is because while the account was funded with pre-tax income, the loan plus interest accrued must be repaid with after-tax earnings. For this reason, repaying the loan may add up to nearly 25 percent more than the amount deposited in the first place. Also, if the borrower leaves the company or doesn’t pay the loan within the specified time frame, it will automatically be considered a withdrawal and incur taxes and penalties.
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