If you are thinking of a 401k withdrawal, you are recommended to proceed carefully, because every withdrawal will mean sacrificing vital benefits of an earlier 401k plan contribution. As you know, each 401k contribution has tax benefits: besides your contribution becoming tax-deductible, your account investment growth is also tax-deferred.

On the contrary, with some rare exceptions, 401k withdrawals are taxable like your ordinary income. Moreover, you will be deducted an additional 10% early distribution penalty tax if you are under age of 59 ½ at the moment of taking your distribution. The exceptions to this penalty are the following:

- if you start considerably equal periodic payments
- if you die and your account is paid to your beneficiary
- if you withdraw an amount of money which is less than is allowable as a medical expense deduction
- if you become disabled
- if you are older than 55 and terminate employment
- if your withdrawal is connected to a qualified domestic relations order

Aside from all penalties and taxes connected to a 401k early withdrawal, you will also lose all your potential future investment growth of 401k retirement plan money. Moreover, as there’re limits to the amount of money you are allowed to contribute to a 401k plan per year, you aren’t able to make up for an earlier withdrawal later, and this is even if you’re on more solid financial ground.

Despite the fact that 401k loans have some considerable disadvantages, you are recommended to consider a 401k loan if you found yourself in a financial pinch where the only option available seems to be your retirement money. Indeed, a 401k loan is preferable to an outright 401k withdrawal.

Another option in such situation is to delay receiving distributions from 401k plan and thus maximize the tax benefits. The benefits in question are those of your tax-deferred growth until the 1st of April of the year following the one in which you reach 70½. The only exception to this rule is the case when you remain employed by a company of which you don’t own over 5%. This way, you have to withdraw at least your Required Minimum Distribution every year.

Your Required Minimum Distribution will be calculated as account balance at the beginning of the current year divided by your life expectancy, which is determined by the Uniform Life Expectancy table of IRS. The exception to this is when your sole beneficiary is your spouse who is over 10 years younger than you. If you don’t withdraw your Required Minimum Distribution, you will face a penalty of 50% of the difference between what should have been distributed and what you actually withdrew.