Investing in a 401(k) can make your retirement years easier, but not everyone can wait until they turn 59½ years old before withdrawing funds. Some people lose their jobs before reaching this age requirement, and others have emergency expenses that require a 401(k) account’s intervention.
How early 401(k) withdrawal works
You can technically withdraw funds from your 401(k) anytime. You don’t have to wait until you turn 59½, but you will have to pay taxes and penalty fees on your early withdrawals. You will have to pay 10% in penalties on the withdrawal. For instance, if someone takes $5,000 out of their 401(k) before reaching the minimum age, that person is charged a $500 penalty fee. The fee does not include the taxes you must pay if your plan has pretax contributions.
While most early withdrawals result in penalty fees, several exceptions exist. You won’t have to pay the penalty fee if you use the funds for these expenses:
- You or your spouse gave birth to a child or adopted a child that year only and up to $5,000
- You left your job at 55 years or older — 50 or older if you worked for the federal government
- You have a disability
- You can buy a home with penalty-free early withdrawals if you are a first-time homebuyer or have not owned a home for two years ($10,000 limit)
- College tuition and other qualifying higher education expenses
Why would you want to access your 401(k) funds now?
Some people tap into their 401(k) accounts early because they don’t want to wait to accumulate additional funds. If a great house hits the market and you don’t have enough money for a down payment, your 401(k) account’s funds may be enough to cover the difference. A 401(k) account can also provide stability for consumers who lose their jobs and still need a way to cover living expenses.
The extra cushion can help you seek a better job instead of rushing to the first opportunity that comes your way. While it is ideal to save your 401(k) funds and never touch them until you retire, the cash in your account can help you capitalize on opportunities or protect you from financial uncertainty.
What to consider before cashing out a 401(k)
Aspiring retirees should keep these details in mind before cashing out their 401(k)s.
1. Understand the penalties
An early withdrawal results in a 10% penalty if you don’t use the funds for a qualifying purchase. Some people may have to withdraw more money than anticipated to balance out the penalty payment and taxes. For example, if you withdraw $5,000, you’ll lose $500 from the penalty, but you do not end up with $4,500. You will have to pay income tax on the $5,000 next year, and that catches some people off guard.
2. Don’t forget to explore other options
It’s easy to withdraw funds from a 401(k), but your retirement account shouldn’t be your first choice to cover emergency expenses or adjust to a challenging situation. It’s better to look for alternative income opportunities that provide extra cash when you need it. Building an emergency fund, picking up side hustles, and building your network can add extra layers of protection to your 401(k).
Some people have to withdraw from their 401(k) accounts, but you should entertain other choices. Even if you must withdraw funds from your 401(k) account, you should explore alternatives in case the problem re-emerges. You can use an early 401(k) withdrawal as a learning experience. That way, you can adjust your financial planning and pursue opportunities to reduce the likelihood of another early withdrawal.
How to cash out a 401(k): 3 ways
People build up their 401(k) accounts knowing they will withdraw from them someday. It’s possible to withdraw funds earlier than expected, and doing so can minimize financial hardships. Here are some of the ways you can cash out on your 401(k) retirement account.
1. Take an early withdrawal
If you are not 59½ older, you will incur a 10% penalty fee for withdrawing from your 401(k). Exemptions exist, but consumers should plan for the penalty. This penalty is on top of your income taxes, which depend on your tax bracket. No matter when you withdraw funds from a 401(k), you will have to pay taxes unless you have a Roth retirement account.
2. Check for qualifying events
A qualifying event is a purchase or lifestyle status that exempts you from the 10% penalty. Making a down payment for your first home, covering expenses up to a year after you or your spouse gives birth to a child or adopts one, and paying for college tuition can help you escape the early withdrawal penalty.
3. Consider 401(k) loans or lines of credit
Some consumers can borrow lines of credit against their 401(k) accounts instead of incurring early withdrawal penalties. Lines of credit also have interest rates and fees, but you can avoid most of them with on-time payments. A line of credit only accrues interest when you borrow against the credit line. This approach protects your 401(k) funds from penalties and delays your tax payments. Borrowers can replenish the credit line when income improves and expenses become more manageable.
Who do I contact to cash out my 401(k)?
You have to contact your 401(k) plan’s administrator to withdraw funds. Consumers can reach out to human resources from their companies to get more details.
Give Yourself More Choices For A Smoother Retirement
It’s OK to withdraw from a 401(k) account early, but you will incur penalties for non qualifying purchases and events. Knowing you can withdraw from your 401(k) can relieve some day-to-day stress, but it’s better to use other income streams and build an emergency fund.
Should I cash out my 401(k)?
It is a good idea to consider alternatives before cashing out a 401(k). Those penalties can add up, and you won’t have as much money left for retirement.
Can I withdraw from my 401(k) before retirement?
Yes. You can withdraw from your 401(k) before retiring.
How do you withdraw money from a 401(k) when you retire?
You have to contact your plan’s administrator to withdraw funds. Some companies provide detailed information about how withdrawals work, but you can also reach out to human resources.