Know Your 401k Tax Penalties!The 401K tax plan is a form of retirement plan that is available in the United States. It is basically an employer sponsored retirement savings plan that enables the employee to save money for retirement in a tax deferred manner. With a 401k matching, the employer offers a guarantee that they match a percentage of your contributions, which is usually 50 cents on the dollar. The benefit of the 401k-tax plan is that there is no need for the employee to pay federal income tax on the amount that is deferred to the 401k account. These earnings are also not taxed till withdrawn which results in a major benefit in implementing this plan. However there are some situations where there are 401k tax penalties that have to be borne. One such reason is an early withdrawal penalty of 10% if a withdrawal is made before the age of 591/2. If this withdrawal is not rolled over to another employer sponsored retirement plan, you will have to bear a 10% early withdrawal penalty. This penalty can be avoided if you leave the company when you reach 55 or older of if you are made disabled and have an urgent need for the money. Withdrawing the money in equal payments, made annually over your life expectancy or the joint life expectancy of yourself and your designated beneficiary can help you avoid 401k tax penalties. Some plans also permit you to make withdrawals for some medical expenses as long as the amount does not exceed the permitted deduction amount of your income tax return. The best thing to do to avoid any 401k tax penalties is to consult a reputed and trusty financial or tax advisor with whom it is possible to discuss your personal questions and doubts about your 401k tax. If you happen to incur some tax penalties, it would be better for you to pay these penalties instead of procrastinating on it. This is because the longer is the delay you make in paying your tax penalties, the higher will the interest amount that accumulates in it. You can get a rough idea about 401k tax penalties by surfing through the internet as there are many sites offering you information pertaining to this. Of course, always double check with your consultant as they will be the better person to give you tips on avoiding and paying this 401k tax penalties. |