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401k Withdrawal Options – Guide to a Hassle Free Fund Management
The term retirement evokes mixed emotions. After a long span of workaholic, career centered professional life we definitely would like to relax and enjoy our retirement days. Proper savings will help you reap a relaxed life at the time of retirement. 401k is a type of savings account where you can set aside money for your future. You can make a contribution to this plan throughout your professional life and can make withdrawals once you retire from your job. There are many 401k withdrawal options available which will help you in pulling out money at the time of need.
What is 401k?
Today millions of people are opting for 401k plan offered by their employers. In simple words it is a defined benefit retirement plan where you set aside a part of your income which is invested to build your savings for the future. To be a part of a 401k plan you must be an employee of a company and your employer must sponsor such a plan. You have the liberty to choose how much of your income has to be set aside each payday. Your employer will contribute accordingly up to a certain limit. There are tax benefits for the same. You can also choose from a list of investment options such as stocks, bonds and money market mutual funds, allowing you to create an investment mix that reflects your comfort level with risk.
Withdrawal Options
401k is a retirement benefit plan and any withdrawals before that time period invites penalties. All 401k withdrawal options are taxable as ordinary income. There are some exceptions in this case for example if you die and the amount is paid to your beneficiary, you become disabled, you terminate employment and is at least fifty five years old, you withdraw an amount less than what is allowed as a medical expense deduction, you begin substantially equal periodic payments and your withdrawal is related to qualified domestic relationship order.
You can usually withdraw money anytime once you have reached the age of fifty nine and a half. Any withdrawals before that are taxable and you need to pay a penalty which is ten percent of the taxable amount you withdrew. A 401k loan or a 401k hardship withdrawal is your only hope when you have a financial emergency. All 401k plans do not allow hardship withdrawal option so you must check it first. A 401k loan is always preferred when compared to hardship withdrawals because you cannot repay money you take as hardship withdrawal and you may be prohibited from making a contribution to your 401k plan for six months following the withdrawal. You may also face an early withdrawal penalty of ten percent and pay taxes on the money withdrawn. In 401k loan you do not face such taxes and guidelines.
Knowing your 401k withdrawal options is a must to make wise decisions. Money you pay to 401k is untaxed but you will generally be subjected to taxes when you withdraw it. It is generally advised that we must know the in and out of a 401k plan for making better choices of investment so that we can garner a tension free retirement life.