A 401k retirement is designed in such a way that it encourages employees to save considerable amount of money for post-retirement period. Tax law provides exemption of taxes on money invested in 401k plan and allows that money to grow on a tax-deferred basis until withdrawal. In return the tax law restricts the withdrawal of money before the age of 59.5.
If you withdraw money before reaching 59.5, 401K withdrawal rules dictate that the withdrawal amount will be subjected to an additional tax of 10 percent. This tax is in addition to regular income tax. Since the money you invest in 401k plan is exempted from tax, you will be subjected to tax when you withdraw money.
The 401K rule also allows penalty free withdrawal if you become permanent disable, if you are laid off, quit or fired or retires early and you are above 55 years old or you leave your current job, in order to roll your retirement savings into a new 401K account or if your medical bills exceeds 7.5 percent of your gross income.
Besides this some 401K plan allows you to withdraw money from your plan before reaching 59 and half years under a hardship withdrawal clause. Hardship withdrawals are subjected to 10 percent early withdrawal penalty. Hardship withdrawal may be used to prevent foreclosure of house, for buying a new house, for paying health insurance premium, to pay college expenses of your dependent, to pay un-reimbursed medical expenses or to pay for funeral costs.
For withdrawing money under hardship withdrawal clause, one has to submit papers showing proof of the need such as medical bills or foreclosure documents etc.
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