Is using 401(k) money in an emergency the best idea? (1 point)
A.Yes, the money is not needed for a long time.
B.Yes, the money was deducted pre-tax so there is more of it.
C.No, early withdrawal of 401(k) money will incur a penalty.
D.No, since you will lose all your money earned.
C.No, early withdrawal of 401(k) money will incur a penalty.
C.No, early withdrawal of 401(k) money will incur a penalty.
The correct answer is C. No, early withdrawal of 401(k) money will incur a penalty.
To find the answer, you need to understand the rules and penalties associated with the early withdrawal of 401(k) funds.
In general, a 401(k) is a retirement savings plan offered by employers to their employees. The money contributed to a 401(k) is usually deducted from the employee's pre-tax income, which means it is not subject to income taxes at the time of contribution. However, the money in a 401(k) is intended to be used for retirement purposes and not for emergencies or immediate needs.
If you withdraw money from your 401(k) before reaching the age of 59½, you will typically incur penalties. This is known as an early withdrawal penalty. The penalty is usually 10% of the amount withdrawn, in addition to any income taxes owed on the withdrawal. This means that if you withdraw $10,000 from your 401(k) early, you will have to pay a $1,000 penalty.
With this understanding, we can see that option C is the correct answer, as withdrawing money from a 401(k) in an emergency would result in a penalty. Options A and B are incorrect because while it is true that the money is not needed for a long time and it was deducted pre-tax, using it for emergency purposes would still incur penalties. Option D is incorrect because you won't lose all your earned money, but rather pay penalties and taxes on the withdrawal.