You never want to even think about a 401k early withdrawal unless you are faced with some type of emergency or other expense that you just can not find another way to cover. Early withdrawal should always be a last resort that you turn to and should only be considered when you have used all other options that you might have. Before doing so you should also consult a professional so that you can evaluate every last resource.

This is such a serious matter that even the IRS has set guidelines in which a 401k early withdrawal is only aloud. These guidelines include things such as the death or disability of the person participating in the plan, you are at least 55 and have left or retired from the company you had your 401k through, or you are receiving payments in some form from an arrangement of equal value over a lifetime.

When the IRS says "left" the company you have your 401k through this means you have either quit or been fired either one. In these cases the participating company typically requires you to collect or rollover the funds anyway. Some go as far as requiring liquidation of these funds within 60 days or you may be charged fees after that time for not doing so.

These IRS guidelines also include reasons such as the fact that you have paid medical expenses that equal at least 7. 5% of your adjusted gross income. While you will not be required to itemize all of these deductions on your tax return, you will need to save all of your receipts in order to substantiate your claim legally.

Another reason set forth in these guidelines is one stating that you have been bound by the court in a divorce or separation hearing to withdrawal early in order to compensate the other party adequately.

All of the above reasons will allow you to withdrawal early without risk of penalty, but otherwise you will be required to pay an extra 10% on the taxable amount of the plan. Sometimes you might be able to avoid paying that 10% penalty, but either way, the funds will be added to your total income for the year that the money is withdrawn. The downfall to this is that it often puts you in to a higher tax bracket that doesn't actually reflect your real financial means.

Your 401k is probably your biggest asset and so it can be very tempting to cash it out. Sometimes even the penalty can seem reasonable to you if the situation is severe enough. What you need to consider, however, is the other option you have for getting money from this account without imposing all of those penalties upon yourself. For example, you might want to consider taking a loan from the account instead.

The most important thing you can do in this situation is really look at all of your options and make sure you have spoken with some type of financial professional. They can often open your eyes to options you never knew you had, helping you to avoid all of those extra taxes and other penalties.

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