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Key Takeaways
What Is the 401(k) Early Withdrawal Penalty?
You may also face other penalties depending on your gross income.
You might qualify for exceptions to the additional tax.
Withdrawals are taxed as ordinary income.
If you are on the edge of thetax brackets, that money could dramatically increase your marginal tax rate.
Its wise to factor these withholding taxes into the total amount you better withdraw.
If its not enough, youll face a larger tax bill than you expected.
How Does a 401(k) Work?
As a result, distributions are considered taxable income when withdrawn.
Did You Know?
There are exceptions to the 10% penalty.
When its dire and you have no other options, the advantages may outweigh the drawbacks.
People usually cash out their 401(k)s for big-ticket, necessary expenses.
Keep in mind that you may still owe taxes, as the money counts astaxable incomeand increases your AGI.
This money can help fund home repairs, temporary housing or other expenses related to your loss.
Disability or Death
you might make penalty-free IRS withdrawals if you have been declared permanently disabled.
If the 401(k) owner dies, the spouse or beneficiary may also make penalty-free withdrawals.
You pay the money back into your account, typically at a low interest rate.
There is usually no credit check required.
Terms are typically five years.
Ideally, you will have another, easily accessible emergency savings account to use.
If you have good credit, you may qualify for a low-interest personal loan.
You will also pay taxes on the loan based on your marginal tax rate.
Youd ultimately pay $2,200 to withdraw $10,000.
While the IRS offers many exemptions for hardships, other circumstances may not qualify.
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