Is Your Retirement Plan Going To Bite You?
Early withdrawal from your retirement plan or IRA can mean a major tax bite!
It is very important to discuss with your tax advisor any decision to withdraw funds from your pension plan or 401K earlier than the age of 59 ½ BEFORE you make a withdrawal on your retirement plan.
The cost to you for early withdrawal is very high, and there may be some tax alternatives or strategies that could reduce these consequences, depending on your situation. The amount withdrawn is counted as income to you for the year PLUS an additional 10% penalty for premature withdrawal.
The increased income amount could possibly place you in a higher tax bracket where you might lose some tax credits and deductions normally realized by someone with your regular wages.
Many times a company will tell you that you must withdraw your 401K when you leave. You can take it out from your employers plan if required, but you can roll it into another plan of which you have control within 60 days and completely avoid the penalties of early withdrawal.
If you still decide to bite the penalty and take an early withdrawal, properly plan for the tax hit. They will likely ask you if you want to have them take the tax out of your withdrawal. Beware when you answer this question. Most of the time, they take an amount to cover the extra tax as normal income but zero dollars to cover that 10% penalty. When they do this, you think you are covered but find out on tax day that you are not!
ALWAYS consult with your tax professional and financial advisors before making such a taxing decision!
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