Cashing Out 401k

Cashing Out 401K: What You Need To Know!

If you are thinking about cashing out 401k benefits there are a few things you need to understand that will help you avoid adverse tax consequences as well as have enough knowledge to make wise decisions between withdrawals or rollovers so that you can understand the distribution process. 

Almost everyone knows that retirement pensions are a thing of the past and the 401k was meant to take the place of retirement pensions.  This left the responsibility in the hands of the individual to save up a substantial nest egg through saving and investing.  Unfortunately, in recent years the economy has been very unstable causing many people to consider cashing out their 401k plan to pay increasing debts such as mortgages and credit card bills or to simply get more control over their investing decisions.  In addition, there is also the increased risk of being laid off from your job or your employer going under, so there is a lot of good reasons to be curious about this option. 

Facts On Cashing Out A 401K Plan 

If you are cashing out 401k before the age of 59 for any reason, there is a 10% penalty and some employers may require you to withhold 20% more to cover additional income taxes.  The only exception to this scenario is if you are making a first time home purchase.  However, for most people this will not apply as most people have already purchased a home prior to the age of 59. 

When you are considering cashing out 401k plans there are really only four possible options.  The first option we have briefly described and that is to cash it out, or withdraw the funds and pay all of the penalties and taxes unless you are using it to purchase a first time, new home.  The second option would be to roll it over to an IRA account where your money can continue to grow until you reach an appropriate age for retirement.  The third option, which is what most people opt to consider is to roll the 401k over to a new employer's plan, this is assuming that your new employer has one.  And the final option that you might consider is to leave the 401k intact with your former employer.  Remember that the last three options listed here have no penalties. 

By keeping all these options in mind, you should be in a better position to decide which is the best choice for you.