How can you offset the penalty of early withdrawal of your 401K?

Question

If you plan to invest these money into the business? Any ideas how to decrease the amount that goes to uncle SAM when getting your 401K money early?

Answer 1

you can only offset with either losses or other credits/deductions like:
child credit
investment losses
real estate interest
business expenses

I am sure that there are others, but those are the most common.

Answer 2

depends on what you mean offset....

The "penalty" is just an extra tax on the amount you take...so you can offset it just like you do your regular taxes; through deductions, exemptions, extra withholding after the distribution etc etc etc

However, the opportunity costs can never be offset. For a 25 year old...every 10k they take from their 401k means 314k at age 65. That can't be made up. Even if the same person starts fresh at age 26 with a 10k contribution they will only end up with 288k at age 65. That 10k is really 26k!!!

One would think that someone older than 25 is less damaged because of compounding, but likely they are taking more out so the end result is the same...a heavily reduced retirement savings.

Answer 3

I would highly recommend NOT taking money out of your 401(k) early-- you will be hit with a 10% penalty and have to pay ordinary income tax! If you take the money out, you will lose nearly half of your money in the process. You can easily get a loan from a bank, etc. for a much better interest rate. Remember, you can borrow money for most things, but you cannot borrow money for retirement!

Check with your 401(k) administrator about the availability of loans from your 401(k)-- you can take the money out, but you repay it to yourself with interest.

Answer 4

thanks for the answers everyone <3