Home  >  Financial Articles and Q&A  >  I would like to know if I could cash out my 401k?

I would like to know if I could cash out my 401k?

Dec 04, 2012 by Heather from Liverpool, NY in  |  Flag
2 Answers  |  3 Followers
Follow Question
8 votes
Peter C. Karp Level 20

Heather,

If you are still employed by the company that sponsors your 401k plan then you will not be eligible to cash out of the plan. Instead, you can see if your plan offers a loan provision, hardship withdrawal or in service withdrawals. Not all plans offer these features so you will need to check with your employer. If you are no longer employed by the company that sponsors your 401k plan, then you are eligible to get your money out of your 401k plan. You can cash out of the plan or rollover your 401k plan balance to an IRA. If you choose to rollover your 401k plan instead of cashing out, you will not have to pay taxes or penalty taxes as rollovers to IRAs are not taxable transactions if you do them the right way. If you must cash out of your 401k plan and you have not yet reached age 59 1?2 then the dollar amount you cash out will be subject to ordinary income taxes and a 10% penalty tax. Talk to the advisor for your plan to determine the best options for you.

The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies

Comment   |  Flag   |  Dec 05, 2012 from San Francisco, CA

1|600 characters needed characters left
2 votes

Heather,

I am assuming you are under 59 1/2 years old. Please be sure to consult a tax advisor for specifics on any of this. If you absolutely must draw from your 401(k) before 59-1/2, there are a few ways it can be done.

Hardship withdrawals You are allowed to make withdrawals, for example, for certain qualified hardships -- though you'll probably still face a 10% early withdrawal penalty if you're under 59-1/2, plus owe ordinary income taxes. Your Summary Plan Description will spell out what qualifies as a hardship. Although every plan varies, that may include withdrawals after the onset of sudden disability, money for the purchase of a first home, money for burial or funeral costs, money for repair of damages to your principal residence, money for payment of higher education expenses, money for payments necessary to prevent eviction or foreclosure, and money for certain medical expenses that aren't reimbursed by your insurer.

Loans Most 401(k) plans allow you to borrow against your account and repay yourself with interest. Restrictions will vary by company but most let you withdraw no more than 50% of your vested account value as a loan. You then repay the loan with interest, through deductions taken directly from your paychecks. But there are disadvantages. First and foremost, you're robbing your future. Though you may repay the money you withdraw, you lose the compounded interest you would have received had the money just sat in your account. Also, the interest you are paying back is paid using after tax dollars. It is then taxed again upon withdrawal. And some companies restrict you from continuing to contribute to your 401(k) while you're paying back a loan, which could force you to miss out on even more money. If you leave employment for any reason, the loan becomes immediately due. Before you take out a 401(k) loan, you need to consider what would happen if you found yourself out of a job and with a loan on your hands at the same time.

72(t) withdrawals You may be able to withdraw without penalty under IRS rule 72(t), which allows you to withdraw a fixed amount based on your life expectancy. Under the 72(t) rule, you must take withdrawals for at least 5 years or until you reach age 59-1/2, whichever is longer. If you're 56 and poised to retire, for example, you'll get a specified amount every year for 5 years, until you're 61. But if you're 52, you'll get your specified amount every year for 7-1/2 years, until you're 59-1/2. You do avoid the 10% early withdrawal penalty, but you still pay taxes on the amount you tapped.

Comment   |  Flag   |  Dec 06, 2012 from Austin, TX

1|600 characters needed characters left