Retirement Life Today : Retirement Life : 401K Early Retirement

401K and how is it effected when some decides to take early retirement

The 401K plan is a retirement savings plan that is funded by employee contributions and in many cases will often be matched by contributions from the employer as well. The major attraction of these types of plans are that the contributions are actually taken from an employee's pre-taxed salary and the funds grow tax free until they are actually withdrawn. However, what happens if you decide that you want to retire early? Just how does 401k early retirement actually work and penalties if any are involved.

Should you decide that you want to retire before you reach 59½ and so begin taking from your 401k plan then this will generally be subject to 10% penalty on any withdrawals that are made. The whole idea of their being a penalty for people taking early withdrawals from these plans is order to stop people from plundering them before they actually reach retirement age. However, luckily there are a number of ways in which people can avoid paying this 10% penalty and these are shown below.

1. If you are leaving your job on or after your 55th Birthday.

Normally where withdrawals from a 401K plan is concerned the participant may withdraw money before they reach the age of 59½ but they will have to pay a 10% early withdrawal penalty. But however should an employee retire, quit or be fired at the age of 55 or after then they can have a 401k early retirement withdrawal without incurring any penalties.

However it is important to note that penalties will be incurred if you leave a job at any time during the year in which you turn 55 or later or if the plan is with a former employer then it will have to wait until you reach 59½ before you start making withdrawals on it.

2. The Substantially Equal Periodic Payments

This is available to anyone who has a 401k plan and it does not matter what age they are, which makes it a very attractive escape hatch for many who are looking for 401k early retirement. However, the payments must be "substantially equal" and be based upon the person's life expectancy. Then once the payments begin they must continue for a period of 5 years or until the person has reached the age of 59½ depending on which ever is the longest. However, using this option will often give a person the least retirement pay out that is available to them.

It is important that when considering 401k early retirement you take into consideration everything including any penalties that you may well incur.