Cashing Out Your 401k While Still Employed
The first thing to know about cashing out a 401k account while still employed is that you cant do it, not if you are still employed at the company that sponsors the 401k.
You can take out a loan against it, but you cant simply withdraw the money.
If you resign or get fired, you can withdraw the money in your account, but again, there are penalties for doing so that should cause you to reconsider. You will be subject to 10% early withdrawal penalty and the money will be taxed as regular income. Also, your employer must withhold 20% of the amount you cash out for tax purposes.
There are some exceptions to the rule that eliminate penalties, but they are very specific:
- You are over 55
- You are permanently disabled
- The money is needed for medical expenses that exceed 10% of your adjusted gross income
- You intend to cash out via a series of substantially equal payments over the rest of your life
- You are a qualified military reservist called to active duty
You’ll Owe Taxes And Possible Penalties
If you cash in your 401 plan, and you have not yet reached age 59 1/2, then the dollar amount you withdraw will be subject to ordinary income taxes and a 10% penalty tax.
If you are not yet age 59 1/2, your plan will likely enforce a required 20% amount withheld from any balance that you cash out to cover federal taxes. So, for every $1,000 you cash in, you would receive about $800. The other $200 would be sent to the IRS by your 401 administrator. At the end of the year, the 401 plan will send you a tax form called a “1099R” that shows the amount of taxes withheld on your behalf.
In general, you should not cash out your 401. Instead, roll it over into an IRA. When you calculate how much money you would lose by cashing out the account, the choice will become clear. Use an early-withdrawal calculator to help you see how much a withdrawal will cost you.
When you file your income tax return, you must include any cashed-out amounts from your 401 plan as regular income, along with your other sources of income. The amount flows into your tax return on the first page, and, based on your total income and deductions, you will either owe additional tax or receive a refund.
You Lose Thousands In Potential Growth
Even if youre not deterred by tax penalties, think twice before you sabotage your long-term retirement savings goals. When you withdraw money early, youll miss out on potential future savings growth because you wont gain the perks of compound interest. Compounding is the snowball effect resulting from your savings generating more earnings not only on your principal investment but also on your accrued interest.
Also, if you make a 401k early withdrawal while the market is down, youre doing yourself a disservice because youll be leaving thousands on the table. Its unlikely youll fully recover the lost years of compound interest you would have benefited from. You might need to get creative with a passive income stream to help support you later in life.
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A Bank Or Credit Union Loan
With a decent credit score you may be able to snag a favorable interest rate, Poorman says. But favorable is relative: If the loan is unsecured, that could still mean 8%12%. If possible, secure the loan with some type of asset to lock in a lower rate.
Interest is the price of borrowing money. Learn how interest rates work.
If You Get Terminated From Your Job You Have The Option Of Cashing Out Your 401 However This Is Probably Not The Smartest Move
Image source: Andrew Magill.
If you get terminated from your job, you have the ability to cash out the money in your 401 even if you haven’t reached 59 1/2 years of age. This includes any money you’ve contributed and any vested contributions from your employer — plus any investment profits your account has generated. However, you may face a 10% early withdrawal penalty from the IRS for cashing out early, so this might not be the best option. Here’s what you need to know to make an informed decision about your 401 after you’re no longer with your employer.
How to cash out and the implications of doing soThe procedure for cashing out is usually rather simple. All you need to do is contact your plan’s administrator and complete the necessary distribution paperwork. However, there are a few things you need to keep in mind, especially regarding the tax implications of cashing out.
Unless your 401 is of the Roth variety, all of the money you withdraw will be treated as taxable income, no matter how old you are or the reason for the withdrawal. So, even if you are older than 59 1/2, it’s important to consider how cashing out will affect your tax status for the year. If you have a large 401 balance, cashing out could easily catapult you into a higher tax bracket. Your plan provider will be required to withhold 20% of the amount you cash out for taxes , and will also file a form 1099-R to document the distribution.
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Should You Withdraw Early From Your 401k
Ask yourself honestly . . . are you tempted to cash out your 401k early?
You probably have a long list of all the great things you can do with those funds right now. But is an early withdrawal from your 401k really a good idea?
This 401k Early Withdrawal Calculator will help you compare the consequences of taking a lump-sum distribution from your 401 â or even your IRA â versus rolling it over to a tax-deferred account.
Make a smart decision. Use the calculator to let the math prove which is the optimum choice.
If You Are 59 1/2 Or Older
Once you are six months away from your 60th birthday, you can begin making withdrawals from your Fidelity 401k without having to worry about any additional tax penalties. Your 401k is now money thats there for you to start preparing for the next stage of your life as you put the finishing touches on your career and prepare to start drawing Social Security benefits.
However, that doesnt mean you dont have to worry at all about taxes. Money withdrawn from your 401k is taxable income, so you should be careful to consider just how much you need to withdraw in any given tax year to ensure youre not hitting a higher tax bracket and seeing more of your hard-earned money lost to taxes. If you have a Roth IRA or Roth 401k, though, you can make tax-free withdrawals from those, so you can balance withdrawals to minimize the tax impact.
Your Fidelity 401k comes with the option to schedule regular withdrawals so that you can do the paperwork for your withdrawal once and then set up a recurring payment. With structured, regular withdrawals, you can set up a budget that will limit your withdrawals to what you need, and youll be able to have checks showing up on a set schedule.
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How Much Tax Do I Pay On An Early 401 Withdrawal
The money will be taxed as regular income. That’s between 10% and 37% depending on your total taxable income.
In most cases, that money will be due for the tax year in which you take the distribution.
The exception is for withdrawals taken for expenses related to the coronavirus pandemic. In response to the coronavirus pandemic, account owners have been given three years to pay the taxes they owe on distributions taken for economic hardships related to COVID-19.
Because You Asked: How Long Does It Take To Cash Out 401k After Leaving Job
Not every job works out the way you might have hoped. Whatever your reason is for looking for a new employer, you’re probably wondering about cashing out your 401 k from your old job if you’re quitting before you reach retirement age. Depending on your individual retirement account, this may involve penalties.
This article discusses how long it might take for you to cash out your 401 k once you’ve left your job. It also goes over your possibilities for doing so and the different types of 401 k account you can have. If you don’t want to cash out the old account, you can generally transfer the money to a new 401 k plan or IRA account. It would help if you decided this based on any potential penalties and your investment options.
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Alternatives To Cashing Out A 401k
It is highly recommended that you never take a 401k cash out. The money is there to secure your financial independence in retirement. Thats only possible if its allowed to grow to meet your income needs. Cashing out just $10,000 at the age of 40 years old will cost you over $60,000 by the time you reach 60 years old assuming a 33% tax bracket and 7% annual return. Taxes and withdrawal penalties would cost you an immediate $4,300 of that amount.
If you need money, there are alternatives to cashing out a 401k. These options are available while you are still working with the employer that manages the 401k.
- Consider a home equity line of credit or other low-interest loan before cashing out a 401k plan. Personal loans and other types can carry high interest rates but may still cost less than the taxes and penalties youll pay on a 401k cash out
- Go into emergency spending mode. Cut out all non-essential spending for a few months before considering cashing out a 401k. Talk with your creditors to get extensions where you can and avoid digging yourself deeper in debt
- Borrow or withdraw from Roth IRAs first. You may still be jeopardizing your retirement goals but youve already paid taxes on money contributed to a Roth account so it may ultimately be cheaper than a 401k cash out
Which Assets Should You Draw From First
You may have assets in accounts that are taxable , tax-deferred s, and tax-free . Given a choice, which type of account should you withdraw from first?
The answer isâit depends.
- For retirees who don’t care about leaving an estate to beneficiaries, the answer is simple in theory: withdraw money from taxable accounts first, then tax-deferred accounts, and lastly, tax-free accounts. By using your tax-favored accounts last, and avoiding taxes as long as possible, you’ll keep more of your retirement dollars working for you.
- For retirees who intend to leave assets to beneficiaries, the analysis is more complicated. You need to coordinate your retirement planning with your estate plan. For example, if you have appreciated or rapidly appreciating assets, it may be more advantageous for you to withdraw from tax-deferred and tax-free accounts first. This is because these accounts will not receive a step-up in basis at your death, as many of your other assets will. A step-up in basis is used to calculate tax liabilities for your beneficiaries.
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Reasons For Cashing Out A 401k
Its important to remember that your 401k is the money you have set aside to pay for your future expenses. It is protected if you have to declare bankruptcy, while your other assets are not. Cashing out a 401k before you reach retirement age should be a last resort. Still, if you face any of the following situations, you may choose to cash out your 401k:
- You may need to cash out your 401k to help pay bills while you are unemployed.
- Cashing out a 401k may make sense when you are facing large medical bills.
- You may cash out your 401k when there is a small amount of money in it.
- You might consider cashing out a 401k to save your home or for a down payment on a home.
- Consider a 401k cash out to cover education costs for your spouse or children.
Repercussions Of An Early 401 Withdrawal
The IRS sets the rules around retirement savings. There are limits to how much tax-deferred income you can deposit into different retirement accounts per year, what accounts you can put pre-tax dollars in, what accounts you can put after-tax dollars in, even when you can access your money.
Fail to follow these rules, and you could face huge penalties and other expected costs.
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What If You Only Need The Money Short Term
Although there are other qualifying exceptions to withdraw IRA or 401k assets penalty-free, those listed above are the major ones. But suppose youre not interested in paying any taxes at all. You can still use your 401k to borrow money via a loan. The interest goes to you, the loan isnt taxable, and it wouldnt show up on your credit report. Heres how it works.
Receiving Your Money Takes Time
It often takes several weeks to cash in a 401 plan. Some plans for smaller companies have the right to allow account distributions only once per quarter or once per year. There is a 401 summary plan description document that will spell out the rules for your plan. The plan must follow its own rules.
It can feel as though your former employer is making it difficult for you to cash in your 401 plan, but there are strict rules they must follow, along with having all of the proper paperwork completed before they can distribute your money to you.
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How To Cash Out Your 401k And What To Consider
4-minute readMay 18, 2021
One of the surest ways to create a comfortable retirement for yourself is to begin saving early on in your career. A 401 plan a type of financial contribution plan which allows you to put a percentage of your salary into an account whose investment gains remain tax-free until funds are withdrawn presents one of the most popular vehicles for doing so. Even better, employers will often match the amount of money set aside up to a certain amount, effectively guaranteeing you free income.
However, in the event that access to money is needed, especially in the wake of a large or unexpected expense, its not uncommon to wonder how to cash out your 401 as well. Here, well take a closer look at the process of cashing out a 401 early, how long it takes to get access to money, and the pros and cons of doing so, including how much early withdrawal before retirement may cost you.
Cashing Out A : What A 401 Early Withdrawal Really Costs
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Contributing to a 401 can be a Hotel California kind of experience: Its easy to get your money in, but its hard to get your money out. That is, unless youre at least 59½ years old thats when the door swings wide open for a 401 withdrawal. But try cashing out a 401 with an early withdrawal before that magical age and you could pay a steep price if you dont proceed with caution.
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Gold May Not Protect Your Money
Specifically, $2,128.42 invested in the S& P 500 in 1980 would have grown to $6,517.82. Also, the inflation-adjusted return on that money with dividend reinvestment was 11.353%.
In the final analysis, a gold investor will lose money and miss out on stock market gains. Hence, gold is not a good hedge against stock market crashes.
Notably, there were three major stock-market crashes 1987, the 2000-2002 Dot.com bust, and the 2008 meltdown during the years between 1980 and 2019. Yet, the S& P investor still received an 11.353% return on his investment.
Thus, precious metals do not belong in your 401K if you want to make money.
Do You Get Your 401 If You Quit
Be aware of the following rules regarding your old 401 account:
If your 401 has a total investment of more than $5,000, your employer may allow you to leave the account with them even after you quit the job.
If your account has a balance of less than $1,000, your employer may force you out and pay the amount left in your account with a check.
If the total investment amount in your old 401 is between $1,000 and $5,000 and your employer wants to force you out, they must transfer the amount to your IRA.
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Withdrawing Money Early From Your 401
The method and process of withdrawing money from your 401 will depend on your employer, and which type of withdrawal you choose. As noted above, the decision to remove funds early from a retirement plan should not be made lightly, as it can come with financial penalties attached. However, should you wish to proceed, the process is as follows.
Step 1: Check with your human resources department to see if the option to withdraw funds early is available. Not every employer allows you to cash in a 401 before retirement. If they do, be sure to check the fine print contained in plan documents to determine what type of withdrawals are available, and which you are eligible for.
Step 2: Contact your 401 plan provider and request that they send you the information and paperwork needed to cash out your plan, which should be promptly completed. Select providers may be able to facilitate these requests online or via phone as well.
Step 3: Obtain any necessary signatures from plan administrators or HR representatives at your former employer affirming that you have filed the necessary paperwork, executed the option to cash in your 401 early, and are authorized to proceed with doing so. Note that depending on the size of the company, this may take some time, and you may need to follow up directly with corporate representatives or plan administrators at regular intervals.