How much will the tax be on cashing out of a 401k?
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A 401k is an employer-sponsored, long-term savings plan that is intended to help you sock-away money for your retirement. A 401k offers significant tax breaks and has a few drawbacks. The money you put away now to be used later after 59 ½ years of age or at retirement is not taxed until it is distributed. Some companies match part of the dollars that you stash away. Your retirement savings are increased through these employer matching contributions. You can borrow against a portion of a 401K, as long as you pay it back plus the low interest. Otherwise, if you tap into your savings before 59 ½, you pay penalties for early withdrawal and the early distribution is also treated as regular income for tax purposes.
The 401k plan was first created in 1978 as part of the Tax Revenue Act, although it did not become widely used as an investment tool for many years.
Individuals who are 21 years and older with access to a 401k plan through their employer are eligible to contribute funds.
Individuals with access to a 401k plan at work can contribute up to a maximum amount per year, based upon their age and the given tax year. For example, investors within the 2009 tax year who are 49 and below can contribute up to $16,500 per year into their 401k plan, while participants age 50 and older can contribute up to $22,000.