Taking Money Out of Your 401(k) Early

Part of the 401(k)s For Dummies Cheat Sheet

Make taking money out of your 401(k) retirement account your last option. The consequences of early withdrawals from your 401(k) hurt your current tax situation and your future investment potential. Keep the points in the following list in mind as you contemplate dipping into your 401(k):

  • Calculate how much tax you'll owe on a hardship withdrawal before you withdraw the money. You'll owe income tax, plus, likely, a 10 percent early withdrawal penalty if you're under 59 1/2. Your employer withholds some taxes, but you need to make up the rest.

  • Remember that a $10,000 withdrawal at age 35 will result in a loss of more than $210,000 by age 65, assuming a 9 percent investment return.

  • Withdrawing money to help buy your first home can be a good investment decision, particularly if you do it early in the year, when the tax break from home ownership helps offset the additional tax you pay on the distribution.

  • If you borrow from your 401(k), try to continue making new contributions while repaying the loan, to limit damage to your final nest egg.

  • Don't take a loan if you're likely to leave your employer before repaying it. Any unpaid loan balance will likely be taxable when you leave.

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