Real World Graduation: Question 36

RealWorldGraduation_Question_36   <– PDF

The 401(k) system was set up such that people could save and invest their money prior to paying taxes, let the money grow over time, then pay the taxes later when they started withdrawing it as early as age 59.5. However, early withdrawals are permitted for certain hardships with no penalty.  Hardships are defined as large medical bills (as long as they do not exceed what can be deducted on your income tax), disability, and the splitting of a 401(k) account due to a divorce.  Otherwise, early withdrawals are penalized at 10% of the withdrawal amount, and all income taxes on the amount withdrawn are due immediately.  Aside from hardship cases, under what circumstances should the average person consider an early withdrawal from their 401(k), even though they have to pay taxes and penalties?

a) To buy a house, or make a down payment on one

b) To buy a car

c) To use the money to invest in the stock market (buying individual securities)

d) To pay for a honeymoon or other vacation

e) Both a) and c) are valid causes

(The answer is on p. 2 of the PDF)

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