What is the penalty on early withdrawal of 401(k)?

1 min read

What happens if you take money out of your 401(k)? You have to pay a 10% penalty on the amount you withdraw, plus income taxes. That means you could lose up to 40% of your savings. Ouch!

So why would anyone do that? Maybe they need cash for an emergency, want to pay off debt, or have a better investment opportunity. But whatever the reason, you should think twice before tapping into your retirement fund. There are other ways to get money without sacrificing your future.

For example, you could borrow from your 401(k) instead of withdrawing. You'll have to pay interest, which goes back to your account. You'll also have to repay the loan within five years or when you leave your job, whichever comes first. Otherwise, it will be treated as a withdrawal, and you'll owe the penalty and taxes.

As you can see, taking money out of your 401(k) early is a costly decision. You'll lose not only the amount you withdraw but also the potential growth of your savings over time. That could make a huge difference in how much you have when you retire. So unless you have no other choice, leave your 401(k) alone and let it grow.

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