Setting Up a Distribution of 401k Funds

A 401k retirement plan allows employees to save money during the course of their working career. It provides a financial security blanket for retirement. There will be situations that may require that you withdraw your money before retirement age. The federal government has placed early withdrawal penalties that has made it costly to remove your money before the age of 59 ½. The fines you may have to pay can reach up to 30% so it is important to be informed.

Review The Policy

Speak with your employer about going over the particulars of your policy. Many 401k plans are not the same. Your particular policy may have exclusions to the 10% penalty, which will allow you to distribute 401k funds earlier. The exclusions depend directly on your company policy. Ask your human resource account administrator for more information. Read over the information carefully, with special focus on the  penalty free exclusions. Knowing what is in your policy will help you know what options are available to you. Though the penalty costs to withdraw are high, the federal government offers a few exceptions to the rule. These exceptions will allow qualifying individuals a chance to receive the funds they have already invested.

Distribution Options 

You can request a distribution of your funds if you were terminated or laid off. Another option would be for you to allow it to sit with the employer if it has reached more than five thousand dollars. This will allow it time to grow and mature. If you become permanently disabled, you can request your funds to be distributed to you.  You can also have your 401k retirement funds distributed once you are 59 ½ years old. Another option is to request a check from your employer. An employer check will have a deduction of 20% withheld, which is the required withholding amount by the government. It will also include the withdrawal penalty fee of 10% as well. That is a total of 30%.

Early Distribution With No Penalties

The federal government allows for a few exceptions to the 10% penalty for an early withdrawal. You may be exempt from the penalty if you changed companies and want your retirement funds to roll over to the new company. Usually the rollover process is simple and easy.

There are also other circumstances that do not charge penalties. For example, if you have unexpected medical bills with no other way to pay, then you are eligible for a penalty distribution of retirement funds. Your medical bills must be more than 7.5% of your gross monthly income. Also, if you are paying for a dependent's education, or education for yourself, that is another way to have your retirement funds distributed without penaltie.

The most important thing is to read the fine print of your paperwork before you withdraw any funds.

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