April 22, 2017 Leave a comment
Q: I have been employed by this corporate for nearly four years now. I’m 36 years old and trying to collect funds for my son’s private school tuition fee. The fee is quite high and it is rather difficult for me to manage it within my fixed monthly salary. Also, I am the independent earner in the family. Can I withdraw funds from my 401(k) plan? What are the long-term consequences of this action? Alice, Colorado
Ans: Alice, the answer to your question is-Yes. You can definitely withdraw a part of or all of your contributions from your 401(k) account. But each withdrawal is subject to taxes. Therefore, it isn’t as simple to withdraw earnings and collections from your 401(k) account and any potential penalties or taxes due will primarily depend on your age.
Finance experts suggest that even though you could borrow money from your 401 (k) account, you should do so with a lot of reservations. This is because besides your home, your employer-funded retirement plan likely constitutes the majority of your total wealth.
It is important to understand that once the savings in your 401(k) plan are withdrawn, it is very hard to replace them. 401(k) is a tax-advantaged account and therefore allows the accumulation of pretax contributions, with no taxes hindering that growth. The huge advantage of maintaining a 401(k) account is that new earnings get generated on the old ones and you can thus accumulate a greater amount of money as compared to a regular taxable account.
Although you might feel tempted to withdraw money from your 401(k) account, you will end up losing this rather lucrative savings opportunity. This is especially true for younger investors. If you withdraw money from your 401(k) account before the age of 55 years, you will likely face high penalties.
If financial hardship is making you consider a withdrawal from your 401(k) savings, then you could think about a 401(k) loan. However, avoid taxable withdrawals as much as possible.
Broadly speaking, there are only three scenarios in which you should consider pulling out money from your 401(k) account:
- When the average account balance has reached a $92,500 high.
- You are equipped to handle repayments.
- If you quit employment, the loan might become due.
Most investment experts would advise against withdrawal from a 401(k) account and let the account ride for as long as possible. Also, do your research when looking for a credible provider. For instance, www.401keasy.com can help you easily set up an account, make contributions and also track all account activities within minutes.