Why Do My Financial Advisors Suggest You Should Never Take Money from A 401k Account Early

If you plan to sign up for the 401(k) or you have obtained one, you should realize that maintaining it is something tough. Having such retirement account is a huge step towards a monetarily secure and independent retirement age. However, it is unpredictable when you will experience financial setbacks, and you have to be careful. If you encounter a financial problem and dip your hand into the 401(k) account, then you are doing more harm than gain.

These accounts have strict regulations that can make you suffer a lot of penalties and reduce your investment. And as Zachary Fineberg, an investment advisor with the Fineberg Wealth Management notes, he would not recommend any person to take early withdrawals from their 401(k) unless they qualify exemptions to penalties. For many, the retirement accounts seem an easy reach for them when they are in financial problems.

However, these accounts are not designed to serve that purpose, and that is why they are protected with things like tax and penalties. A 10 percent fee may only be waived for employees under one or more of the following categories;
• If you are using your dollars towards a tax-deductible medical expense. Meaning any medical expense that exceeds 10 percent of your adjusted gross income in case of adults under 65.
• If you are permanently disabled.
• When you retire or exit your employer company that is associated with the 401(k) account, but at the age of 55 or older.
• If you must turn over a fraction of your 401(k) amount in order to satisfy a court order for lawsuits such as separation and divorce.

When you tap into your retirement account early, you may be hit with huge costs in terms of penalties and taxes, and in addition, you run the risk of laying on line your future in order to pay for the present. You do not have to jeopardize your future for the present things. Many people see the 401(k) as an easy source of cash. When they find themselves in financial difficulties, they try to tap into those resources.

This could be a big mistake and you need to watch out. Taking money from the 401(k) is a big mistake even if you are taking a loan. It can have long term repercussions, and you need to ensure that you refrain from using this resource. The contributions to traditional 401(k) account lower the amount of taxable income and your earnings grow tax-free.

In addition, you do not own income taxes till you start making withdrawals at the age of 59 and half years. If you have not attained the age of 59 and half, then it should be a last resort to use the resource in your 401(k) account. In the short term, such an action will owe income tax on the withdrawals you make and in addition, you will suffer a potentially 10 percent penalty on the same.

A 10 percent IRS penalty is imposed on distributions from any qualified retirement plans or the traditional IRAs. If you calculate that cost, it could amount to close to 40 percent money lost. In the long term, when you take money from the retirement account, it means that you are reducing the assets that potentially grow on tax free basis. This may put your future savings into trouble.