April 29, 2024
Question:
Since you have been focusing on taxes and financial planning, can you talk about 401(k) 20% mandatory tax withholding? I am just hearing of this. Does it apply to other retirement plans (i.e. 403b, 457)? Isn't this forcing you to take out possibly more than you would have planned for in retirement?
Answer:
The 20% mandatory tax withholding applies to withdrawals from a 401(k) before age 59 1/2 (if the withdrawal does not meet an exception to this rule.)
This withholding does apply to other pre-tax retirement plans. The rule is a way to discourage people from taking funds out of their retirement accounts early.
Exceptions are:
Receiving the payout over time.
Qualifying for a hardship distribution with the plan administrator.
Leaving your job and are over a certain age.
Domestic abuse survivor.
Getting divorced.
Giving birth to a child or adopt a child.
Become disabled.
Put the money in another retirement account.
Using the money to pay an IRS levy.
Using the money to pay certain medical expenses.
Disaster victim.
If you overcontributed to your 401(k).
If you were in the military.
If you are terminally ill.
If the owner passes away.
Do your friends ask you financial questions?
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