Cash Out 401k

To cash out 401k accounts there are heavy penalties, but in some circumstances you may decide it is worth it. Of course, because of the heavy costs associated with it, it is also important to consider multiple alternatives first.

What happens when I cash out 401k

When you go to cash out your 401k you will be charged federal and state taxes, and a ten percent early withdrawal fee unless you are over 59 years old. With taxes and the ten percent early withdrawal penalty this can easily mean you will lose thirty to forty percent of your account, plus the money the account would have accumulated up until the point of retirement.

When you leave a job you have a number of options for what to do with your account.
1. Leave the account where it is.

2. Roll the account into a 401k with your new employer.

3. Rollover to an IRA (investment retirement account)

4. Cash out 401k, and pay the penalties I explained above.

If you pick any of the first three options you pay nothing and your money stays tax free, and accumulates. However, with these options you cannot touch your money until retirement at 59 ½ years of age.

Popular reason to cash out 401k

Of course, there are still many reasons people decide to cash out 401ks. Often people will do this because they are behind on mortgage payments, they have medical bills, they have been laid off, or their investments are plummeting and they are worried about their money.

If you have medical bills or mortgage payments you can talk to you accountant about claiming economic hardship and trying to avoid the penalties.

If you are considering withdrawing because stocks have dropped, you are losing money, and you are worried about your account you have a difficult decision to make. History tells us that in the past once the economy hits its bottom it will come back up and your money will be ok, but there is no guarantee about where that bottom will be. Of course you can keep the money in the tax sheltered 401k without investing in stocks. The money will sit there and not go up really, but it won't go down either, and when the economy improves you can invest again, without having to pay all the withdrawal penalties and saving for retirement.

But I need money now: Alternatives to cash out 401k

There are ways to get money without using your retirement savings. Some plans have the option to borrow money from your account. A 401k loan typically has to be paid back within five years. If you fail to do this the money then comes out and you are charged withdrawal penalties and taxes as though you had cashed out your 401k in the first place. You can borrow up to 50% of your balance, or $50,000, whichever is less.

If you are trying to avoid withdrawing you can borrow other ways too. You can look into refinancing your mortgage, or taking out a home equity loan. Of course, borrowing can be particularly risky if you are currently unemployed because without an income it can be harder figuring out how you'll repay the loan.

If you have an accountant or other financial professional it is a great idea to go over these options with them before deciding what to do, but ultimately the decision to cash out 401k money is up to you.