401K Payout
A 401k payout can be done without penalty once you are 59 ½ years old, but before then there are some options to look into if you need money from your 401K now.
When you are experiencing economic hardship, where you will lose your home or apartment or you have medical bills, you can withdraw from your account without penalty but the money has to be paid back to the account.
Some plans allow for 401k loans which can be up to 50% of the account, or $50,000, whichever is less. This money must be paid back with interest, but the interest goes straight into your account. If you do not repay this money within 5 years you have to pay the early withdrawal penalties as though you'd originally cashed out.
Some plans will allow you to use the money for tuition if the courses will further your current career.
When you leave a job you have a couple of options for your account. You can leave it where it is, roll it into a new account with a new employer, roll into an independent retirement account (IRA) or cash out and pay the penalties.
What happens when you take an early 401k Payout?
If you take a 401k payout you will be charged federal and state taxes, plus a ten percent early withdrawal fee. The federal tax amount varies with your tax bracket and state taxes vary state to state, but the penalty can easily amount to thirty to forty percent, plus the loss of the money the account would have accumulated up to the point of retirement. If any of the alternatives stated above will work for you it will probably be worth it.
Of course if you need cash now this is a price you may feel you have to pay. Most financial advisors will try to persuade you to find another way however, because if you fix your current financial problems this way you will have more financial problems when it comes time to retire.
Other options include refinancing your home, selling a vehicle, returning any recent major purchases, and taking out loans.
Because of these heavy fees people only take a 401k payout when they feel they have no other choice.