As you know, there are many tax benefits of contributing to a 401K. With this in mind, you should also know how the withdrawal process works, when you can get your money, penalties that may arise, and how to pay back the IRS if you find that you owe more in taxes than you can handle.
The biggest benefit of a 401K is that you do not have to pay taxes on the money you are contributing. But when you are finally ready to take out this money you will find that things are not quite the same. Every withdrawal that you make from your 401K plan is taxed. On top of this, if you withdraw your money before the age of 59.5, you are going to incur an additional penalty. The early withdrawal penalty is 10 percent in addition to any money that you will owe in taxes. Also, if you leave a company after the age of 55 or become disabled, you may be able to withdrawal money from your 401K without being hit with a penalty.
Generally speaking, 401K plans only allow any early withdrawal to deal with a financial hardship such as medical bills, losing your job, avoiding foreclosure, etc. It is very important to speak with your employer if you are interested in early withdrawal. Just remember, even if you are facing a financial hardship, early withdrawal is going to result in a penalty.
Plan for Tax Implications or Taxes Owed To IRS When Withdrawing from 401k
It is absolutely necessary that you plan for the tax implications of withdrawing money from your 401K plan. This holds true no matter if you are taking money early, or you have waited until 59.5 or older. Every dollar that you withdraw is going to be considered taxable income.
If you do not plan ahead you may find out when tax time rolls around that you owe the IRS a large chunk of change. Most people do end up owing additional money when they withdrawal money from their 401K because they did not have enough withheld from their paycheck. With the right planning you can be assured that you have enough money to cover any tax liability.
Do you think that you will not be able to pay the tax that you owe due to your 401K withdrawal? If so, you need to know all your options. The best one to consider is an installment agreement. This type of resolution
allows you to pay your taxes monthly as opposed to all at once. Setting up an installment agreement with the IRS is a simple process.
If possible, it would be in your best interest to wait until age 59.5 or older to withdraw funds from your 401K. This way you will only owe tax on the money, and can avoid a 10 percent penalty. Always remember: the money you put into your 401K is not taxed. But you will pay taxes when you withdraw the funds.
There are many options available if you cannot pay the taxes owed in full to the IRS. Get your best options by requesting a free tax relief consultation
from a tax professional that can help you resolve your tax problem today.