401k plan withdrawals, charges and exceptions

The current economic turmoil that we are going through at the moment has resulted in lots of people changing employers. This in turn has aroused various questions that relate to 401k plans, and the effects that a change in employer will cause. So here are a few guidelines to help out.

If you have a 401k plan with your previous employer and you need to get cash money out of it, all you need to do is to contact your former employer, and ask him to send you the required forms to be filled in. As an ex-employee, you can ask any time, to have your 401k funds cashed out.

What you should consider is whether this is the right option or not. Unless you are over 59 and half years of age, then you will be subject to a 10% penalty over the amount of money that you withdraw. Apart from this, your ex-employer will also retain an amount of money from the lump sum you need - that amounts to 20%, and send it as a down payment on income tax to our friends at the IRA.

If you are thinking whether there is a way around the penalty charges, the reality is that there isn’t. This penalty was set in place exactly for this reason which is, in order to put off people from spending their retirement money before they reach retirement age.

There are however some exceptions. If you are 55 years of age or over, and you are retiring early from the company who is sponsoring your 401k plan, then you are able to take monthly payments from your savings with no penalty. You will however pay income tax on the monthly payments.

The other exception is substantially equal periodic payment, which allows you to withdraw a given amount of money regularly from the 401k plan, for five years or until you reach 59 and half years.

Reference: http://www.401khelpcenter.com/faq/faq_main.html