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The act of getting personal finances in order is an essential part of living a healthy and balanced life. This is because how a person spends money will be directly related to what their priorities are and reflect their emotional state. Part of the solution to achieving a successful home budget is learning what tools and resources are available. To that extent, some people make use of a 401k withdrawal to jump start their financial stability.

Consider a 401k Withdrawal Carefully

Exercising a 401k withdrawal should be a last resort to restore balance to a budget because of the tax consequences. The funds from a 401k withdrawal are treated by the IRS as earned income in the year the withdrawal is made. This will not only subject the amount withdrawn to taxes but it will result in a person's personal income for the entire year being subject to a higher tax rate. It is common for an employer to withhold 20% of the amount withdrawn for federal taxes but bear in mind this will likely be insufficient. The IRS will also apply a 10% early withdrawal penalty unless certain conditions are met. Between the IRS early withdrawal penalty, federal, state, and local income taxes combined, the average person will surrender 35-45% of the 401k withdrawal to taxes.

However, taxes aren't the only consideration a person needs to be aware of. Less money in a 401k will result in less growth for the 401k account overall and less money to live off of during retirement. The average American over age 50 has only $27,000 saved towards retirement. Therefore, gutting a 401k to solve today's financial hardship may well end up inflicting decades of hardship during retirement.

If After These Important Considerations It Still Makes Sense Then Do It

If the cash infusion of a 401k withdrawal still makes sense, then proceed forward with that option but consult with a tax accountant first. This step is crucial because the last thing anyone wants to do is owe taxes at the end of the year. The account can advise you accurately as to how much of a withdrawal must be made to get the target amount of money needed. Just remember that bailouts are not a long-term solution. Without the proper discipline taught by techniques such as those at this website, a person is likely going to be in worse shape after the 401k withdrawal. This is because the same bad financial habits will continue but a valuable asset will have been depleted.

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12y ago

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