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How Much Will I Get If I Cash Out My 401k Early?

Dylan Telerski / 19 Jun 2020 / 401k Resources

Man checks retirement account through Ubiquity 401k Provider

Considering a 401k withdrawal? Here’s how much you can get if you choose to cash out your 401k:

  • Traditional 401k (age 59.5+): You’ll get 100% of the balance, minus state and federal taxes.
  • Roth 401k (age 59.5+): You’ll get 100% of your balance, without taxation.
  • Cashing out before age 59.5: You will be subject to a 10% penalty on top of any taxes owed.

Cashing out early will also result in lost growth. Therefore, it’s recommended that you let your money sit as long as possible to reap the full reward of your retirement savings. Of course, in some scenarios, it’s easier said than done to let the cash sit.

How Much Will I Lose Cashing Out My 401k Early?

Consider this concrete example. Let’s say your plan allows early distributions, so you decide to take $10,000 out of your 401k. You’re taxed at a federal rate of 22% and a state rate of 8%, so you’ll end up paying $2,500 in federal tax and withholding, plus $800 to the state. That means that you will be paying a hefty $4,300 from your retirement savings to receive $5,700.

Worse yet, assuming the average 8% year-over-year returns, leaving that $10,000 in the account could make you $68,485 over the next 25 years.

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Should You Cash Out a 401k When Leaving a Job?

One option after you have left your employer is to have the plan administrator cut you a check for the full amount you’ve invested in the 401k plan. However, the check balance will only be for 70% of your 401k balance — with 20% deducted for taxes and 10% deducted as a penalty.

For most, a better alternative would be to roll the 401k over into a new employer’s 401k, OR (if you don’t have a new employer yet) into a Solo 401k or IRA.

Arranging a custodian-to-custodian transfer within 60 days of leaving your job will not trigger a taxation event or a penalty. That way, your money can continue to grow and earn interest, and you can elect to take your regular distributions in retirement as originally planned.

Should You Take a 401k Loan or 401k Withdrawal?

Some plans allow loans from 401k plans as an option to get access to the fund for virtually any purpose. Maybe you want to travel, pay your child’s college tuition, put a down-payment on a new house, or cover the cost of a divorce. There are many personal reasons to consider a loan.

Generally, you can take up to 50% of the balance to a maximum of $50,000. The good news is that there is no age restriction, and there are no taxes due when you take out a loan. However, the loan must be repaid over a five-year period, with interest owed back to your account.

There is risk involved in taking out a loan. Some plans allow you to roll over a 401k (and loan balance) when changing employers. However, in other cases, you may have to pay your outstanding loan balance in full within 60 days of leaving an employer; otherwise, it will be considered a 401k withdrawal, taxed as ordinary income and subject to the 10% withdrawal penalty.

Compared to a loan, an early 401k withdrawal:

  • Must have an option that allows for in-service withdrawals, which may be restricted by age or hardship.
  • Will be taxed as ordinary income (while loans are generally not taxed).
  • Can be subject to a 10% penalty if you’re under 59.5 (whereas there is no restriction with loans).
  • Will not require repayment (as you would a 401k loan).

Are there any exceptions for getting 401k cash early without penalty?

You can cash out a 401k before age 59.5 without paying the 10 percent penalty if:

  • You become completely and permanently disabled.
  • You incur medical expenses that exceed 7.5% of your gross adjustable income.
  • You are court-ordered to give funds to a former spouse or dependent.

In some cases, 401k cash with the 10 percent penalty is the best option. The purchase of a primary residence, higher education tuition, preventing eviction, out-of-pocket medical expenses, or a severe financial hardship can cause you to need the funds sooner rather than later.

The case for NOT cashing out a 401k early

Keep in mind compound interest only works if you leave the money sitting. When you cash your retirement checks early, you’re not only subtracting that sum from your future retirement, but you’re also negating potential interest accrued over the years and losing almost 30 percent of your balance to taxes and fees.

It may be tempting to view your 401k as your own personal bank account, but it can be so much more if you have the willpower to let your money work harder for you.

Are you considering taking money out of your 401k? Try our 401k calculator to see if this option is right for you.

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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2020 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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