Disadvantages to Early 401k Withdraws
There might be a time when you want or need to get money out from a 401k prematurely. However whenever you do take money out early you are hurting your future self. If you are in one of those situations where you need to take money out early you can always try to take out as little as possible to avoid the terrible side effects.
The 401k withdrawal rules state that for early withdraws you must pay a 10% penalty on your money in addition to taxes. So if you are in the 28% tax bracket and take money out early then 38% of the money you take out will go to paying all of these bills.
1/3 of the money that is takes out simply vanishes. What this means is that you would have to take out even more money from your plan causing you to harm your future retirement even more.
What most people do not realize when they take money out early is how much it really can add up because of interest. If you get out $10,000 today that does not mean that you will have $10,000 less in the future. Instead it could mean that you are hurting yourself even more then you would think.
Let’s assume that you would have made about a 10% annual interest on your money and do not need to retire for 20 years. After 20 years $10,000 would be worth $67,274. It is amazing to think how much of a big difference it can make to keep money into your account.
Once more there is a maximum 401k contribution That all plans have. This means if you are already depositing the maximum amount you can’t just add a little bit more each month to make up for it.
In general taking out a 401k withdrawal prematurely is normally not a very wise decision. However there may be times when you simply do not have a choice. In a situation like this you could always limit the amount you do take out.
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