Since your Qualified Retirement Plan – (401(k), 401(a), 403(b), SEP IRA, 457 Plan, Simple IRA Plan, Keogh Plan/HR-10) - is funded with pre-tax dollars, that means that there is no income tax until you take withdrawals. The government is careful to secure their claim to your money. Early withdrawal from a 401(k) comes with a 5-year repayment on loans and a 10% penalty on early withdrawals. No doubt these penalties are to discourage you from taking your money out before you reach your retirement age – 59 ½.
Aside from a hardship withdrawal or the $10,000 you can withdraw for purchasing a new home, these penalties prevent you from accessing your money when you will need it the most. In fact, early withdrawals from a 401(k) for unpaid medical bills is always among the number one cause of bankruptcy year after year. Investments should always offer accessibility to your money when you need it most.
