Author: Mock Webware
Many people are tempted to tap into their 401 (k) funds to pay off their debt, but before you drain your savings you need to know if you are eligible to withdraw and determine if the taxes and reduced funds are worth it.
Perhaps the biggest drawback of early withdrawal is the penalties and interest you will have to pay. In addition to paying income tax (depending on your income bracket this could be as much as 37%), you will also pay a 10% early withdrawal penalty. If you want to pull out $20,000 and you make $40,000/year, you could end up paying a $2,000 penalty, $5,000 income tax, and an additional state tax. After all of the fees and penalties, you would walk away with less than $13,000 to use. Additionally, the extra money you withdraw will be counted as income for the year and it may kick you into a higher tax bracket - resulting in you paying more in taxes for the year.
Two more things we suggest you consider is the value of that money if you hadn't withdrawn it and the ramifications of not having that money available when you retire. What is your plan if you approach retirement and don't have enough saved to stop working? That could be a harsh reality to deal with in your late sixties. The older you are, and the more money you take out, the greater that risk is.
We recommend you consult with a licensed tax professional before withdrawing from your 401 (k).
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