When Can You Cash In On Your 401k?

 The following is a guest post. Enjoy! 

Financial turmoil is likely to hit us all at some point throughout our lives and having a fund like a 401k saved away can be a tempting option to dig you out of a hole when it’s most needed.

A 401k is a retirement fund that you take out with whatever company you are working for. They then, usually, match whatever you put into it, up to the value of around 3-6% of your annual salary. The money invested into the 401k is put into stocks, shares, bonds, and many other different facilities to aid in its growth over time. You are not taxed on the money that you invest until you withdraw it during retirement.

However, one of the downsides of a 401k is that you can’t access your money, even in an emergency, until you are 59 ½ unless you are willing to incur the charges that come with cashing it early, and they aren’t cheap.

Firstly, you will lose 30% of whatever is in it due to taxes. So, for example, if there is $5000 in your 401k, you will lose $1500 of that straight away, before any penalties have been applied. Doesn’t sound like such a wise move anymore, right?

If you are still employed by the company that you took the plan out with, ie the people who are matching your contributions, you cannot take out your 401k. Once you have left the company, you can then opt to withdraw your 401k, which is usually the time that people start playing around with the idea due to being out of work.

There are a few scenarios where you won’t have to pay your 10% fee if you withdraw before the designated age and these are deemed as a period of hardship in your life, but again, if you are still employed by the company your began the plan with, you can’t.

Situations of hardship include:

  • If you incur medical bills equal to over 7.5% of your salary
  • You become permanently disabled
  • Your work is terminated  in the year you turn 55 or older
  • In the event of your death; the 401k is then paid to your designated beneficiary
  • You have to pay a tax on the 401k yourself

Financially, it is a poor decision to cash in your 401k, and it should always be seen as an absolute last resort and not a pot to tap into if you feel like going on holiday. It is a relatively wise investment, and it should stay that way until it has matured properly.

In short, if you want to cash out your 401k early expect the following factors:

  • 20-45% taxed as ordinary income.
  • A 10% penalty fee

A key point is to always try and remember why you took out a 401k in the first place; for your future. If you cash in early, that future won’t look as bright.

How about you all? Have you ever taken a withdrawal from your 401k or other retirement account? Do you regret the decision, or do you think it was the right thing to do?

Share your experiences by commenting below!