If you withdraw funds early from a traditional 401(k), you will be charged a 10% penalty, and the money will be treated as income. Some 401(k)s follow a vesting schedule that stipulates the number of years of service required to own the employer contributions to the account, not just the employee contributions.
Cashing out a retirement account can be tempting, but there are financial implications now and at retirement. If you're in a short-term cash crunch, you could consider borrowing from your retirement account rather than cashing out.
Take an early withdrawal
You'll need to speak with someone at your company's human resources department to see if this option is available and how the process works. Generally, you'll need to complete some paperwork, and describe why you need early access to your retirement funds.
The short answer is that yes, you can withdraw money from your 401(k) before age 59 ½. However, early withdrawals often come with hefty penalties and tax consequences.
In retirement, you can withdraw only as much as you need to live, and allow the rest to remain invested. You can also choose to use your 401(k) funds to purchase an annuity that will pay out guaranteed lifetime income. Internal Revenue Service. “401(k) Resource Guide - Plan Participants - General Distribution Rules.”
The short answer: It depends. If debt causes daily stress, you may consider drastic debt payoff plans. Knowing that early withdrawal from your 401(k) could cost you in extra taxes and fees, it's important to assess your financial situation and run some calculations first.
Transferring Your 401(k) to Your Bank Account
That's typically an option when you stop working, but be aware that moving money to your checking or savings account may be considered a taxable distribution.
Typically, you can't close an employer-sponsored 401k while you're still working there. You could elect to suspend payroll deductions but would lose the pre-tax benefits and any employer matches. In some cases, if your employer allows, you can make an in-service withdrawal if you've reached the age of 59 ½.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
When you withdraw early from your 401(k), you'll pay income tax at your typical tax rate, plus a 10% penalty, unless you qualify for an exception. Regardless of your age, withdrawals from a traditional 401(k) are never tax-free, because contributions are made with pre-tax dollars.
A general rule of thumb is that cash and cash equivalents should comprise between 2% and 10% of your portfolio.
Depending on how big your nest egg is, paying off your mortgage with your 401(k) could make sense. However, look at your other savings or assets first. If you need to stretch your 401(k) into retirement, it may make more sense to keep it invested and use other assets to pay down your mortgage.
If you withdraw from your 401(k) before you reach age 59½, you may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that you must include in income. The 10% tax will not apply to distributions before age 59½ if you qualify for an exemption.
The $1,000 per month rule is designed to help you estimate the amount of savings required to generate a steady monthly income during retirement. According to this rule, for every $240,000 you save, you can withdraw $1,000 per month if you stick to a 5% annual withdrawal rate.
For example, some 401(k) plans may allow a hardship distribution to pay for your, your spouse's, your dependents' or your primary plan beneficiary's: medical expenses, funeral expenses, or. tuition and related educational expenses.
Depending on who administers your 401(k) account, it can take between three and 10 business days to receive a check after cashing out your 401(k). If you need money in a pinch, it may be time to make some quick cash or look into other financial crisis options before taking money out of a retirement account.
However, when you take an early withdrawal from a 401(k), you could lose a significant portion of your retirement money right from the start. Income taxes, a 10% federal penalty tax for early distribution, and state taxes could leave you with barely over half of your original amount, depending on your situation.
By age 59.5 (and in some cases, age 55), you will be eligible to begin withdrawing money from your 401(k) without having to pay a penalty tax. You'll simply need to contact your plan administrator or log into your account online and request a withdrawal.
Taxes will be withheld. Then, you'll need to deposit the full amount withdrawn, before taxes, into a new 401(k) or IRA retirement savings account within 60 days to avoid taxes and early withdrawal penalties (if you're not yet at retirement age).
Does Cashing Out a 401(k) Hurt Your Credit? Taking money from your 401(k) via a loan or a withdrawal doesn't affect your credit. Taking money from your IRA or other retirement accounts has no bearing on your credit or credit score, either.
“As a general rule, dipping into your retirement funds to cover a short-term need could end up costing you more in the long run,” says Walker. “If it's possible, I'd encourage you to consider other ways to access cash that could be more beneficial to your long- and short-term financial goals.”
If you do opt to borrow from a 401(k) or retirement plan to buy a car, make sure the auto loan interest rate you will pay for the loan is the same or lower than the interest rate you might get elsewhere. Also, make sure you understand the tax ramifications of taking a loan from your retirement account.