If you've been thinking about cashing in a 401k, this is a good place to find answers. Even if you really need some extra cash or you have an extra 401k from an old job, cashing in a retirement savings account is not a good idea.
For this discussion, cashing it in means making an early withdrawal of 401k money to use for something other than retirement expenses or retirement savings. We are not talking about rolling over to another retirement account as cashing in.
Most of the time, cashing out 401k money before retirement is a bad thing to do.
Why is it a bad idea?
Because you will lose 30% of your 401k early withdrawal to taxes and penalties, whereas at retirement time, you are likely to pay a much smaller amount of tax on the same withdrawal.
Also, you will need to make up this savings later to keep your retirement savings growing.
You are allowed to access a portion of your account balance under the 401k hardship early withdrawal rule when you can document the hardship according to the IRS 401k rules.
If there is truly a hardship, you will be able to access the total of the amounts that were deducted from your pay.
You will not be able to access the employer match portion or any profits earned from the investments.
Also, you will pay a 10% 401k early withdrawal penalty, as well as the 20% tax on a 401k withdrawal which will be withheld for federal income taxes.
If you happen to be considering cashing in a 401k from a prior employer, you aren't required to document a hardship. You can simply request a distribution/withdrawal. You will receive approximately 70% of your balance due to taxes and penalties.
Our opinion is that only the most dire hardship imaginable
is enough justification for cashing in any 401k.
You're better off keeping it or rolling it over to an IRA,
even if it is just a thousand dollars.
One situation covered as a hardship early withdrawal is the purchase of your primary residence when your 401k money is the only source of funds available to make it work.
You will still have to pay taxes (20%) and the early withdrawal penalty (10%). Only the amounts that you contributed are available. Any employer match or investment profits are not available for this early withdrawal.
There are very specific requirements to meet to qualify under this provision. To find out more, you should contact your 401k plan administrator. Your human resources department can provide the contact, or you might find this information on your 401k statement.
Our opinion is that this can be a good move as long as
it can be properly maintained.
A home without a mortgage is an important asset for your retirement portfolio so using retirement savings to purchase a home is as good an investment as saving for your future retirement.
Cashing in your 401k after you retire is possible, but it may not be a good idea to cash it in all at once. You will owe income taxes on the amount you withdraw in the year you receive it, but you will not owe any early withdrawal penalties, of course.
One reason you might want to get your money out of your 401k account is to have more investment options than the plan provides, at lower costs. To do this, you should roll over your 401k to an IRA (after you reach age 59 1/2 if you use this money for monthly early retirement income.)
You should discuss this topic with a tax and financial advisor to decide whether to cash in the 401k or roll it over.
Our opinion is that it depends on your tax situation, the size of the 401k, and the context of this account with the rest of your financial situation.
I retired at age 55 and take a "retirement paycheck" from one of my 401k accounts, but I had a smaller one that I rolled over to an IRA.
When I reach age 59 1/2, I will probably roll over the larger 401k to an IRA also.
That way I will have more investment options available to me.
For more on 401k plans, read other pages of this site (see the menu on the left.)