What is the penalty for liquidating 401k


23-Sep-2017 14:40

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If you have an individual retirement account (IRA), 401(k) plan or other qualified retirement plan, you probably know about the penalties that occur if you withdraw your funds (also known as taking early distributions) before you reach age 59 1/2.

Take the money out early and you will pay a 10% fee plus all applicable federal, state and local income taxes.

You will need proof from a doctor confirming that you are physically or mentally unable to hold gainful employment.

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So talk to a plan administrator or tax accountant before you choose this option.You can also evaluate whether liquidating savings or using credit is a better decision that may end up being less costly than a retirement account distribution. Avoid taking any chances of getting hit with an underpayment penalty or having to make extra tax payments when you file your taxes.If you are interested in learning more about IRA and 401(k) withdrawal rules you can find out how to take money out of these accounts before, during, and after retirement using this helpful guide: Withdrawal Rules for 401(k) plans and IRAs The content on this site is provided for information and discussion purposes only.Education funding: If you use your withdrawals to pay for the education costs (including room, board, books, etc.) for you, a spouse, children or grandchildren, the distributions are not subject to the 10% penalty.

Buying a first home: You can use up to ,000 from an IRA per person without penalty to buy your first home.If you liquidate an IRA before reaching age 59 1/2 and don't qualify for an exception, you will need to report the money you receive as income on your tax return.The IRA income from the early withdrawal is taxed as income, but is also treated differently from other income: An additional 10-percent tax penalty will apply to the money you receive, regardless of the amount.The amount you need and the length of time you will need it will determine the best source.