A 401k plan is one of the best options for saving for your retirement. You are able to save pre-tax dollars into an account with investing opportunities. Many times the employer will match your contribution giving you, in essence, free money for you to invest as well. Tough economic times encourage people to tap into their 401k and pay down debt and bills. Is this a good idea?

If you choose a 401k withdrawal and are not over the age of 59 1/2 you are going to be taxed heavily. The funds from your 401k will be taxed by your company as ordinary income and provided to the IRS. A 10% penalty will also be assessed, which is not immediately taken out of your proceeds like a tax, but it due to the IRS nonetheless. You will be giving up a lot of retirement money back to the IRS. An 401k early withdrawal should be the very last resort if you are in need of money.

There are basically five reasons that the IRS allow you to early withdraw from your 401k. They are:

1. Large medical bills for you or your family.
2. To prevent the foreclosure of your home.
3. Costs directly related to buying a primary residence.
4. Expenses for burial of parents, your spouse, children or any other dependent.
5. Costs for your spouse, children or yourself for post secondary education.

Even for a a hardship withdrawal you may still be taxed and penalized for the money you need. You will be required to exhaust all possible means of financing or loans before the 401k plan can be utilized for funds. And there are limits to how much you will be able to withdraw under the law.

In case you leave your current employer and they give you a lump sum distribution, you should do a roll over of the funds into a qualifying account like an IRA to avoid penalties and taxes. That would be a good time to learn beginner stock market investing. The government is clear with the intent of the 401k: It is for your retirement and should not be touched until you are over 59 1/2.

Once you’re ready to retire, you’ll want to make sure that you and your family have all the resources you need to continue to take care of bills and medical expenses, and to live comfortably. A 401k retirement plan can help you do just that. But how does the plan work? Here are some details about this retirement plan, as well as some ideas on how you can make your 401k work for you.

Tax Planning

The tax deferal of the 401k retirement plan can actually increase your takehome pay in some instances due to fact the monies set aside are taken out pre tax thereby lowering your taxable income are. This can allow you to continue getting the money you need to take care of your needs now and not pay taxes on your retirement savings until you actually use it.

Many companies offer matching contributions which they use to encourage employee participation in the program. Of course doing this will increase your savings and your investments will increase. You can decide whether you want your savings to be matched each month, or if you want to have your company match your savings annually; asking to be matched every month will most likely maximize your investment.

The fact that a 401k retirement plan deduction is taken from your paycheck automatically also makes it easy for you to save on a regular basis. You don’t have to worry about withdrawing a certain amount from your check each month and placing it in a separate account, and you also won’t have to deal with the hassle of trying not to spend your savings.  This will help you to organize your finances, and may even open up the door to other investment opportunities.

In most cases, you can access your 401k retirement plan in case of an emergency, which means that if you really need the money right away, you can have access to it. You just have to make sure that you replace it as soon as you can, since the money should be taken out as a loan. If you simply make a withdrawal to your account, you can’t replace the funds, so be sure to choose wisely. Medical expenses or schooltuition are some of the reasons that people choose to make withdrawals, but you may want to talk this over with your financial advisor prior to making such an important decision.

Be sure to keep in touch with your company’s HR department often to be notified of any changes to your 401k retirement plan, and if you have additional questions, you can visit any number of financial sites to find relevant information.

Tax Planning