If you have a 401K and are thinking of closing the account you may want to think again before you do. If you close this account you will be charged a 401K early withdrawal penalty and possibly an extra tax. This additional tax will be charged if you close out your account before you are 59 and half years old. Another thing that you will want to keep in mind is that any money distributed from a 401K is considered income and you must file it as income on your tax return. This penalty usually applies to any retirement plan that you have whether it is a 401K or any simple IRA.
A 401K early withdrawal penalty will be applied if you decide to withdrawal your money. The reason for a 401K is to help you with the things that you need once you retire. Waiting until you have reached the age of 59 and a half you will not have to worry about the 401K early withdrawal penalty. The penalty for early withdraw is usually 10% of the taxable amount.
One thing to consider is whether it is worth pulling out the money from your 401K if you are just have a short term financial emergency. Planning for your future is something to take seriously. A 401K withdrawal penalty should be thought about before you go through the motions of getting that money.
When you make that early withdraw you must file that as income on your federal taxes. There is a place on form 1040 line 15 just for that money. Also the IRS has a form called form 5329 for a possible exception to the tax penalty.
There are some exceptions to paying the 401K early withdrawal penalty if you can qualify for it. A few of the exceptions are if you roll-over your retirement into a new retirement plan you do not have to pay the penalty. Another exception is if the person that has the 401K dies or becomes disabled. If you become 55 and retire from your job you do not have to pay the penalty either. If you are a first time home buyer you may not have to pay the 401K early withdrawal penalty. One other way of getting out of paying the penalty is if a court of law makes a decision such as a divorce decree or in a separation agreement. In either one of those situation the 401K withdrawal penalty would not have to be paid.
In the end it is your money and you will need to decide what is the best way to use your money. Having it sitting in a 401K may give you piece of mind but having it to use in these hard times may be best for you. It is your money and you need to decide how to use it to best meet your needs. You decide, use your money and be willing to pay the penalty or keep it in the account.
