A 401(k) is designed for retirement savings, so you’ll often face IRS penalties if you withdraw funds before age 59 1/2. In addition to a potentially hefty tax bill, your money will miss out on the potential to grow since it’s no longer invested. We’ll take a deep dive into 401(k) withdrawals and 401(k) loans in this article. You’ll learn the rules and the differences between withdrawals and loans, as well as how a 401(k) loan or withdrawal can affect your retirement planning. Learn more: What is a 401( ...

Core Insights - The article discusses the financial challenges faced by Robert, a utility line supervisor recovering from shoulder surgery, particularly regarding funding his daughter's college tuition of $32,000 [1][2][3] Financial Situation - Robert's short-term disability income is insufficient to cover his expenses, including a mortgage, utilities, groceries, and the recent tuition bill [1][2] - He has approximately $195,000 saved in his 401(k), which is his only account with enough funds to pay the tuition on time [4] Withdrawal Implications - Although Robert is over age 59½ and would not incur an early withdrawal penalty, the $32,000 withdrawal would be taxed as ordinary income, potentially costing him $7,000 to $8,000 in federal taxes [5] - The withdrawal would also prevent future compounding of retirement savings, which could lead to a significant loss in potential investment growth over time [5] Long-Term Consequences - The article highlights that withdrawing from the 401(k) may seem like a quick solution but has long-term financial repercussions, including permanently reducing the retirement account balance and triggering a high tax bill [6][7] - It may also limit Robert's financial flexibility in the future, potentially delaying retirement or necessitating work post-retirement to recover the lost savings [7]