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What is the Penalty for Cashing Out a 401K?

Everything you need to know about cashing out your 401K account prior to reaching retirement age.

Many businesses offer employees 401K accounts. These accounts allow people to contribute funds towards their retirement, and some employers even match employee contributions dollar for dollar. The funds are taken directly out of the employee’s paycheck and are not taxed. However, if a person needs to access the funds prior to reaching the age of 59.5 years, there are serious tax consequences.

CASHING OUT WHILE YOU ARE WORKING

You cannot withdraw funds from your 401K while you are working. You may be able to take a loan out against your retirement funds. Usually, repayments are taken directly out of your paycheck until the loan is paid back. These loans are risky because if you get laid off or otherwise are unable to pay the money back into your account, the loan is treated as a withdrawal and you become liable for the 10% early withdrawal penalty tax. You cannot take a loan out while you already have one outstanding.

CASHING OUT AFTER TERMINATION OF EMPLOYMENT

After your employment is terminated, either by you or by your employer, you have the right to withdraw funds from your 401K account. However, if you are under the age of 59.5 years or are separated from employment by reason other than retirement, you are subject to a 20% tax penalty from the federal government and a 10% early withdrawal penalty. Your 401K administrator can withhold these taxes at the time of withdrawal.

OTHER OPTIONS

If you are no longer working, you can roll your 401K funds into an IRA account, which is set up through your bank. There are no tax penalties for doing this, but you still cannot access the funds for a certain period of time.



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