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How To Cash Out Your 401(k) Early – And Why To Reconsider

Scott Steinberg

6 - Minute Read

UPDATED: Feb 23, 2024

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There are plenty of scenarios where it would be helpful to use retirement savings now rather than later. While cashing out a 401(k) to cover your cost of living or unexpected charges may seem tempting, it’s not always a recommended financial move. Doing so could come with penalties attached if you’re under 59 ½ years old or haven’t yet retired. It’s good to know it’s possible to pull money from your 401(k), but knowing when it makes sense versus other alternatives is vital to making the best decision for your financial life.

Can You Cash Out Your 401(k) Early?

If you meet certain criteria and your 401(k) provider allows early withdrawal, you can take money from your account in certain circumstances. But if you go about cashing out your 401(k) while you’re still employed, and/or under the age of 59 ½, you’ll often face withdrawal penalties for doing so.

As a general rule of thumb, you can’t cash out your 401(k) if you’re currently working for the employer that sponsors the plan. That said, some 401(k) retirement plans may make allowances for a loan or early withdrawals. To find out if you’re eligible to do so, contact your plan provider.

If you take money out of your 401(k) under most circumstances, you may be hit with a 10% early withdrawal penalty on the funds.

Should you change employers or part ways with the company that sponsored the 401(k) plan though, more options for accessing the funds may open up. For instance, you may be able to roll over your balance into an IRA or cash out the plan entirely. Rolling over your account balance into a traditional IRA allows you to potentially avoid income taxes and penalty fees, which may prove advantageous for those under 59 ½ years of age. Similarly, you may be able to cash out or roll funds over into a new plan if you get hired by a new employer and your new job offers a new 401(k) program.

How To Cash Out Your 401(k)

In all instances, when looking to take money out of a 401(k), you’ll need to contact either your plan provider and administrator or your employer’s human resources department. But the way in which you’ll cash out your savings depends on your particular employer and the manner via which you elect to withdraw your funds. Your employment status may also impact whom you need to contact as well.

To start with, it’s important to check with your employer’s human resources department to determine if it’s possible for you to withdraw funds early. Note that not all companies allow for this prior to retirement. In addition to connecting with your employer’s HR team, you’ll also want to review the terms and conditions of your plan to note which potential withdrawal options that you might be eligible for, and any fees you might incur.

Afterward, you’ll determine what type of withdrawal you’re making, contact your plan provider, and request necessary documentation and paperwork. Once paperwork is completed and signed by any necessary parties (which may include plan providers and HR), then filed with your plan administrator, funds become ready for withdrawal. An electronic funds transfer or check will then be issued to you.

Consequences Of Early 401(k) Withdrawals

As alluded prior, potential penalties and fees for withdrawing 401(k) assets exist if you are younger than age 59 ½. Taking money out from your retirement savings early may require you to pay a 10% penalty on any funds that have been withdrawn. On top of it, your plan administrator may also withhold 20% of the money for the purpose of paying federal taxes.

Be aware, though: If you terminated your employment after turning 55 and are currently between the ages of 55 to 59 ½, you may be able to avoid penalties. Research your plan’s options and penalties before moving forward.

Hardship Distributions Can Allow Penalty-Free Withdrawals

In certain circumstances, such as in that event that you become disabled, you may be able to make a penalty-free hardship withdrawal. Alternately, you may also be able to do so in the event that you encounter a significant financial setback, such as the need for expensive medical treatment. If you have questions about your eligibility for a hardship withdrawal, speak with your employer and plan administrator.

What Counts As A Hardship?

  • The following circumstances may constitute a legitimate hardship in the eyes of plan sponsors:
  • Preventing an eviction or foreclosure
  • Paying for unreimbursed medical expenses
  • Buying a home
  • Funding educational costs
  • Paying for funeral expenses
  • Being a military reserve member called to active duty
  • Paying for a birth or adoption

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Alternatives To Early 401(k) Withdrawal

If you need money now, keep in mind that an early 401(k) withdrawal isn’t the only option.

Use The SECURE Act 2.0 For Emergency 401(k) Access

Via legislation that was signed into law with the SECURE Act 2.0, you may be able to access funds in an emergency situation. Under its terms, employers can include options within retirement plans for employees to save up to $2,500 year for emergencies and for workers to withdraw up to $1,000 a year for unforeseeable emergency needs. Employees who are terminally ill or victims of domestic abuse may be able to tap funds without penalty as well. Should you be impacted by a disaster and suffer economic loss, you can also avoid penalties for early withdrawal provided you do not withdraw more than $22,000 either. This Act may not cover everyone’s situation, though.

Consider A 401(k) Loan

A 401(k) loan often proves a helpful alternative to a hardship withdrawal. Using one, you effectively borrow money from yourself, typically up to a limit of $50,000 or 50% of the vested value of your account, whichever is lesser. To find out if your plan allows you to do so, and just how much you are eligible to borrow, contact your plan administrator and HR department.

Look Into Substantially Equal Periodic Payments (SEPP)

Another way to potentially avoid early withdrawal penalties is to take out funds using substantially equal periodic payments, or SEPPs. Using this method of financing, you define a payment schedule under which you regularly withdraw money in equal balance amounts over the course of your expected lifetime. However, once withdrawals have begun using SEPPs, you are obligated to take the payment distribution for 5 years or until you reach age 59 ½, whichever period of time is longer. This method may not be the best choice if you need cash in the short term.

Note that SEPPs are only available after you’ve parted ways with an employer – and that if the market dips significantly or you take too high a rate of withdrawal, your Individual Retirement Accounts (IRAs) or 401(k) could run out of money using this method.

FAQs: Early Distribution Of Your 401(k)

Many working professionals have questions about cashing out their 401(k) plan early. Below are answers to several of the most common queries.

Should I cash out my 401(k) if I need money now?

Generally, no, not if you can avoid it. Penalties may apply if you do so, and it inhibits your ability to maximize long-term investment savings if you elect to do so.

Can I cash my 401(k) anytime?

Not necessarily, especially if you’re under age 59 ½ and not retired. You’ll want to review your plan terms and conditions and speak with your employer and 401(k) administrator to find out if you qualify to do so, and under which circumstances.

How much will I lose if I cash out my 401(k)?

You could wind up paying a 10% penalty on the money. Plan administrators and employers may also withhold 20% for taxes.

Who do I contact to cash out my 401(k)?

Looking to withdraw funds from your 401(k) or roll it over into another retirement account? You’ll want to speak with your current or former employer’s HR team and your plan administrator. Contact information is typically found on plan documents.

The Bottom Line: Examine All Options Before Cashing Out Your 401(k) Early

Cashing out your 401(k) may seem like a good option to get your hands on extra money quickly at first. But it often comes with high financial penalties attached and isn’t always your best financing option. Before looking to withdraw sums from your 401(k) early, it’s important to do your homework and research possible alternatives upfront, so that you can make the best financial decision for your individual household and budget. To make sure you’re on track to meet your savings goals, download the Rocket Money℠ app today.

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Scott Steinberg

Hailed as The Master of Innovation by Fortune magazine, and World’s Leading Business Strategist, award-winning professional speaker Scott Steinberg is among today’s best-known trends experts and futurists. He’s the bestselling author of 14 books including Make Change Work for You and FAST >> FORWARD.