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Retirement 401K withdrawal

401K withdrawal calculation

When considering a withdrawal from your 401K account it is always a good idea to consider the cost of the withdrawal.

Under certain circumstances there is little or no penalty to making a withdrawal but then there are those times and circumstances when the penalty is pretty steep. It could be as simple as waiting a few months or wording your withdrawal application correctly to eliminate a penalty.

401K Early withdrawal

This is a very common request and often very costly. What you need to consider are the following.

  1. The IRS will withold 20% of the withdrawal amount. You may get some of it back in the form of a refund depending on your tax liability ate the end of the tax year.
  2. Early withdrawal attracts a 10% penalty which is deducted at the withdrawal stage.

Therefore, it could mean that you are sacrificing as much as 30% of the withrawal amount (your retirement savings) to satisfy a “want” . It is very important to consider this sacrifice, as the future and your retirement piece of mind are also at stake here.

When you consider that social security is only designed to cover 40% or less (depending on your earnings) of your retirementy requirement. We simply cannot afford to trust that the Government will have sufficient in the Social security pot to go around.

Always consider your withdrawal reasons very carefully before agreeing to take a penalty on your money that is intented to see you through your retirement years. Use the retirement calculators to evaluate what the real cost would be.

Under what circumstances will the IRS waive the 10% witholding tax?

There are of course circumstances under which the IRS will waive the 10% witholding tax but these are very specific and is generally not under the circumstances that most people seek to make an early withdrawal.

  1. In a divorce, there will be no witholding tax where the court orders the split of a 401K account. – In these circumstances there may be no penalty and no witholding tax but will vary on a case by case basis.
  2. If you leave your employement at 55 or the year you turn 55. In the case of emergency services workers like firefighters, police, boder protection and customs workers, there will be no witholding at age 50 or over. You must be employed in a federal position.
  3. Lastly, if you choose to take the early withdrawal in small amounts annually until you are 59 years 6 months old or at least 5 years of equal amounts. This sgain needs to be applied for and is on a case by case basis.

There are a number of other instances where being disabled, moving to another 401K account or qualifying retirement investment and others. There is also a “hardship withdrawal” like the following.

  1. Money to buy a home
  2. College tuition and accommodation
  3. avoidance of foreclosure
  4. funeral costs

There are a few others as well but you would need to consult a tax practitioner for more details, and if you have a 401K for small business plan, a tax practitioner is also recommended.

40% of current workers are not saving for retirement

This is a very sad state of affairs and when we consider that social security will likely provide less than 40% of these workers needs in retirement, the picture looks even worse for both the workers and the Government who will need to support them through social intervention.

Social security will not have enough money to sustain retiress by 2034

This is an extremely worrying statistic in a country where saving for retirement is decreasing. The Millenials are saving less than ever before as they live at a fast pace in a consumer driven World. Millenials see a sudden windfall like the lottery or a bitcoin surge as security! 


Of Americans stop working before 65 due to ill health. Are your finances able to sustain you should you fall ill and need to stop working?


Less than 10% of low income households have retirement savings. This means that higher income earners will be paying more in taxes in future.

Could you live on less than $20 000 per year?

The average social security payment in 2018 was $1410/month or approximately $17 000/year. This is not enough money considering your medicval expenses WILL increase as you age and perhaps you will be unable to work. It is imperative that you start saving and plan to retire comfortably at 50 to give you choices.

18% of Americans are confident they will retire finacially secure

This is a shockingly low figure and we should all try to avoid putting ourselves in financial difficulty at retirement. If you are employed and able bodied, there is no reason you should not be saving for retirement. Social security should be for thos in desperate need not those that squanered their money on consumption.

Medicare does not cover everything and Americans will spend as much as $280 000 in out of pocket medical expenses in retirement.

Making small changes in your lifestyle can have an enormous impact on your retirement savings

The power of compound interest is taught to most of us in school yet most of us do not pay it any heed. This is likely due to us not having a retirement plan. Saving for the future is not fashionable it would seem, but those that make regular savings contributions are the ones that will be enjoying the beach in retirement. 


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