Penalties For Cashing Annuities Early
The financial world is a complicated one. Without the right guidance, it is easy to get turned around and confused. It isn’t surprising how little is known or understood about having a 401K. For many people, there are more questions than answers, but the professionals at Joyce CPA, LLC are here to help in Miami and beyond. The most basic knowledge about 401K annuities is that if an employer offers the option of a plan, employees can choose to pay into the 401K over time. Apart from that, there are other facets of the 401K that are far less easy to understand. The problem is, if the 401K itself is hard to understand, how can one understand if anything goes wrong? What about any penalties for cashing out early? These are some of the questions the professionals at Joyce CPA can answer.
The Basics on a 401K
Basically, if your employer offers the option, you can choose to have a portion of your paycheck set aside as part of an annuity to your 401K- that is a certain amount of money taken out and saved for retirement (if you are worried if this is being handled properly, ask for more information about a 401K audit). Essentially, the money within the 401K is only meant to be cashed out upon retirement as a cushion once you stop working, it is typically not intended to be taken out sooner. However, sometimes if one is going through financial hardship, they may be tempted to cash out some or all of the money in the account early which can come with its own consequences.
What Happens if Annuities are Cashed Out Early?
It is a fact of life, things happen, and it may seem like there is no other choice but to dip into your 401K. There are, however, a few different things that could happen as a result of cashing in early (being younger than 59 ½ is considered early). Firstly, for whatever amount of money you decide to take out, chunks of it are taken automatically as different tax penalties. The IRS automatically take twenty percent of the cashed out amount; followed by another chunk for state taxes (this amount varies by state). Finally, another ten percent is taken out as an early withdrawal penalty. In some extreme cases and if it is allowed in your particular plan, an early cash out could be considered a hardship withdrawal and may be allowed to be taken without taxes and penalties if the situation meets with the qualifications. Probably the most significant consequence of cashing out early is that you could potentially compromise your retirement. By lowering the amount of money in the 401K, it stands to reason that there will be far less money in the account when it is finally time to retire. There are other ways to use your 401K to help get out of a tricky financial situation without cashing out and accruing penalties. Borrowing a loan against your 401K is an option if your plan allows it. Essentially, you would be borrowing the money from yourself and paying it back with interest. It would have a smaller impact on your overall retirement funds and still help in financial hardship.
As previously mentioned, the world of 401Ks is a complicated one to those who aren’t well informed. If you have questions about annuities or if you wonder if you should have a 401K audit started, in the Miami area call or visit Joyce CPA, LLC today for more information on how to protect your 401K.