Cashing a 401k because you need money now will hurt you in the future. If you have a way around doing this you should seriously consider your options.
If your retirement plan is the only way for you to obtain money you can look at ways around withdrawing money directly.
Some plans allow you to take out loans from the account. There are always limits on this, it can usually be up to 50% of the account total, or $50,000, whichever is less. You have to repay this money within five years, but the interest rates are always very low and the interest you pay goes directly into your retirement plan. If you don’t manage to repay all of the money within the five year limit then whatever balance you still have left is treated as though you directly withdrew it in the first place, and you will be charged an early withdrawal penalty and taxes, which can easily total up for thirty to forty percent.
Another option instead of cashing a 401k if you need money now because you have medical bills or may lose your home is to apply to take some money from your retirement plan under conditions of economic hardship, but the same rules about repayment as above typically apply.
If you decide to withdraw from the account you’re going to lose a lot of money. There is a 10% early withdrawal fee for anyone who withdraws before turning 59 1/2 years old and on top of that there are state and federal taxes that have to be paid. Depending on your income bracket and state tax percentage this can easily total thirty to forty percent. It shouldn’t be overlooked that you’re also going to be missing out on the money that would have invested and grown over the years into a nice nest egg for retirement.
For all of these reasons if you’re looking to be cashing a 401k because you need money now, consider your other options first.
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