What are the benefits of waiting to make a 401(k) withdrawal?


Quick Answer

One of the benefits of waiting to make 401(k) withdrawals at least until after age 59 1/2 is the avoidance of an early withdrawal penalty tax, reports the Internal Revenue Service. Additionally, delaying withdrawals from 401(k) accounts allows the funds to continue to experience tax-deferred investment growth, advises About.com.

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Full Answer

If 401(K) owners take withdrawals from their accounts before they are 59 1/2 years old, the distributions are subject not only to standard income tax, but also a 10-percent penalty tax, according to the IRS. The tax on early distributions is only waived due to exceptional circumstances such as the complete disability of the account owner, medical expenses amounting to 10 percent or more of the owner's adjusted gross income, debt the owner owes to the IRS, a call to active duty of a reservist for 180 days or more, or the initiation of a series of substantially equal periodic payments.

Waiting to withdraw funds from a 401(k) account as long as possible increases the benefit of investment growth, which impacts the age an account owner is able to retire and the retirement lifestyle he can afford, explains U.S. News & World Report. Even if the plan owner hopes to make up an early withdrawal later, the IRS imposes yearly contribution limits on 401(k) accounts, making it difficult to replace large early withdrawals, states About.com.

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