Einstein reportedly said, “Compound of interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
Starting a systematic savings pattern early on and prudently investing for the long-term is a key component to building wealth. Those who wait to start saving for their retirement, not only have to carve out a larger slice of their income but also more likely to need to take on more risk with their investments. Taking early withdrawals will erode your efforts to build wealth, especially from a 401(k) plan.
However, times have been tough for a good majority of hard-working folks due to the global pandemic. Should you find yourself in between a rock and a hard spot, here are some tips and tricks for taking early withdrawals from a 401(k) plan.
First, see if you qualify for exceptions to the 10% penalty, such as a ‘hardship’ (early withdrawals are for those who are under 59 ½ years of age with an active 401(k)). Look into your plan description and see if you can take a loan or check in on 'in-service' withdrawals, which may allow you to roll over the needed funds into an IRA thereby relieving the mandatory 20% withholding by the IRS.
‘Hardship’ withdrawals are allowed by the IRS only for an immediate and pressing financial need for the amount needed for up to $100k. Taking a loan from your plan will allow you to pay interest to yourself, however there are many stipulations you must agree to and can differ from plan to plan.
Remember though, at any age, distributions from your IRA Rollover or 401(k) plan are taxable as ordinary income in the year received. Depending on the amount of your distribution it could possibly push your tax bracket up a notch or two. As Einstein inferred, if you don’t understand the power of compounding, you will pay.