It's fairly easy to put money into a 401(k), but getting your money out can be a different story. That is, unless you’re at least 59½ years old — that’s when the door swings wide open for a 401(k) withdrawal. Show
But 2022's high inflation, rising interest rates and rocky stock market might have some investors itching to cash out early. However, if you do decide to make an early 401(k) withdrawal before that magical age, you could pay a steep price if you don’t proceed with caution. Three consequences of a 401(k) early withdrawal or cashing out a 401(k)
How long does it take to cash out a 401(k) after leaving a job?Depending on who administers your 401(k) account (typically a brokerage, bank or other financial institution), 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. If you're still thinking about cashing out a 401(k) or taking a 401(k) early withdrawal1. See if you qualify for an exception to the 10% tax penaltyGenerally, the IRS will waive it if any of these situations apply to you:
Other exceptions might get you out of the 10% penalty if you're cashing out a 401(k) or making a 401(k) early withdrawal:
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2. See if you qualify for a hardship withdrawalA hardship withdrawal is a withdrawal of funds from a retirement plan due to “an immediate and heavy financial need.” A hardship withdrawal usually isn't subject to penalty. Generally, these things qualify for a hardship withdrawal:
How to make a hardship withdrawalYour employer’s plan administrator usually decides if you qualify for a hardship withdrawal. You may need to explain why you can’t get the money elsewhere. You usually can withdraw your 401(k) contributions and maybe any matching contributions your employer has made, but not normally the gains on the contributions (check your plan). You may have to pay income taxes on a hardship distribution, and you may be subject to the 10% penalty mentioned earlier. 3. Consider converting your 401(k) to an IRAIndividual retirement accounts have slightly different withdrawal rules from 401(k)s. So, you might be able to avoid that 10% 401(k) early withdrawal penalty by converting your 401(k) to an IRA first. (Be sure that you understand the investment and fee differences between 401(k)s and IRAs, of course.) For example:
4. Take out the bare minimum when cashing out a 401(k)“Anytime you take early withdrawals from your 401(k), you’ll have two primary costs — taxes and/or penalties — which will be pretty well-defined based on your age and income tax rates, and the foregone investment experience you could have enjoyed if your funds remained invested in the 401(k). This total cost should be considered in detail before making early withdrawals,” Harding says. So, is it ever a good idea to cash out a 401(k)? It's a good rule of thumb to stay invested. Don’t make a 401(k) early withdrawal just because you're nervous about losing money in the short term. It's also not a great idea to cash out your 401(k) to pay off debt or buy a car, Harding says. Early withdrawals from a 401(k) should be only for true emergencies, he says. Even if you manage to avoid the 10% penalty, you probably will still have to pay income taxes when cashing out 401(k)s. Plus, you could stunt your retirement. “If you need $10,000, don’t make it $15,000 just in case,” Harding says. “You can’t get it back in once it’s out.” |