Taking Some Early Money From a 401k
There are a lot of disadvantages to taking money out of a 401k early. Taking money out of a 401k today can mean that there is less money in that plan to support yourself in the future.
If an investor does take a 401k withdrawal before they reach the age of 59 ½ they may be forced to pay the 10% early withdraw penalty. This is of course in addition to the taxes they would have to pay.
This could be pretty hard to deal with because a large percentage of the money that an investor takes out would be to pay these bills. These early 401k withdrawal rules do not look kindly to people who want to take money out early, but there are a couple ways around them.
For starters if you are in a hardship situation and qualify to take out a 401k hardship withdraw then you would be allowed to take money out without having to pay the penalty. Of course you would still have to pay taxes on that money.
Another thing an investor can do in order to get around these penalties is to take out a 401k loan. Because this is a loan it is not considered income so you would not be forced to pay taxes or any penalties on it. But also, because it is a loan it does have to be paid back with interest.
In addition to that while you still have the loan out you may actually be limited on what you are able to deposit into your plan. This could really hurt your savings because not only would it force you to make interest payments, but you would also be forced to either stop or lower the amount you are putting into your 401k. So in many cases it can be even more harmful then just taking out a simple withdraw.
Basically taking out money from a 401k is supposed to be a last resort scenario. It can be harmful but in some cases it may be the only option an investor has.
