Cash Out 401k
99Cash Out 401k
Think twice before you do it.
A cash out 401k can cost you a lot of money now, and a lot of money down the road.
If you are leaving a job and have a 401k just hanging around, then you have 4 options:
- Leave it in your former 401k plan.
- Roll it to a new employer's 401k plan.
- Roll it to an IRA.
- Cash out 401k and pay the penalties
Most financial experts will tell you the best option here is to rollover instead of doing a cash out 401k (Click here for an article about how to rollover your 401k instead of a cash out 401k). Although, everyone's situation is different and a cash out 401k may be right for you. Please consult your accountant before making a decision.
Cash Out 401k
During tough times, it may be tempting to cash out 401k money. But cashing out can be more expensive than even using credit cards to get by. Cash out 401k should almost always be a last resort. A cash out 401k will cost you 30-40pct tax now AND then a 10pct penalty (Ouch!). Let alone, what you do a cash out 401k could be possibly 5x-10x that amount in lost retirement money from one cash out 401k.
If you cash out 401k, you must pay federal and state tax. You'll also owe a 10 percent early withdrawal penalty but only if you are under 55 when you leave your job.
Let's say you are 40 and have $50,000 and you are going to cash out 401k. A withdrawal like that would guarantee you in the 27% federal tax bracket ($13,500 in taxes) and possibly higher. Then a 10% penalty ($5,000) from the cash out 401k and you will be left with around 60% of your cash out IRA ( Around $30,000). State income tax will possibly cost another $2,000-$3,000.
If you cash out 401k then you are restarting the clock on your retirement date. You will miss out on the growth your money has had to date and future growth.
Laid-off or no current income
If you are laid off, then you may feel forced to cash out 401k to pay the bills. It may be more cost-effective to attempt to borrow instead. Maybe a refinance or home-equity loan to get by until things improve instead of cash out 401k.
For those of you who are behind on their mortgage payments. There are firms out there that will help re-negogiate your terms for you with your bank. Here are a few of the firms I found, there are many others I am sure:
Foreclosure help to stay in your home and lower your payments
I think I read something once that your retirement accounts aren't counted against you when the banks determine your need for rewriting the terms on your mortgage. This way you can keep your retirement account and possibly stay in your home. Please consult one of the above links or an attorney before proceeding.
If you have to cash out 401k, a possible better route would be to roll it into an IRA and just take what is needed, to learn how to rollover, try this link.
Consider taking a loan against your retirement equity instead of cash out 401k.
If your 401k plan allows loans, you can borrow up to 50% of your account balance or $50,000, whichever is less instead of cash out 401k. You have a maximum of five years to repay the loan from yourself, unless you are borrowing for a first home, which allows a longer payback for the cash out 401k loan. This is possibly a much better option that just a cash out 401k. What happens if you don't repay your cash out 401k loan? Well, then you owe the penalties and taxes, just like if you were to just cash out 401k in the first place. Of course, before considering a cash out 401k loan, you should consult your accountant.
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Fixing the 401(k): What Fiduciaries Must Know (And Do) to Help Employees Retire Successfully
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"IRAs, 401(k)s & Other Retirement Plans": Taking Your Money Out
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Cash out 401k Comments
Since I don't have one, there is nothing to cash out :)
Good advice. Roll it over into a Vanguard IRA. They will handle it all for you without incurring a taxable event.
I agree with your points, and Ralph Deeds point too!
I always say, the only way I would cash out my 401K is if I was about to loose my house (could not pay the mortgage) - otherwise - NEVER.
There are a few other reasons I would cash out of my 401k. They are very limited, though, due to the exceptions for making tax-free withdrawals (maybe i'll make a hub on this). One being, $10,000 towards down payment on 1st home. Another being for college. Another yet being for very high medical bills. I believe there are 10 major ones in all.
In general, pretty much never do it.
I totally agree with your points. Saving for retirement is never easy, so it can be tempting to cash out...But it really isnt' a very good idea under any circumstances. You show the math of this very well.
One other way to get your money out would be SEPP withdrawals after you rollover into an IRA. These avoid the 10% penalty, but lock you into annual withdrawals until you are 59 1/2.
I agree, but have this one thing to say. If you teach yourself to invest in stocks now, taking out your 401 K for investement purposes might not be a bad idea. Only use it for that though. Don't go and buy a car with the money. LOL. Everyone in the stock market is trying to dump stocks because they're cash strapped and fear volatility in the market. If you buy these people's stock, you'll get great prices and after this temporary wave of economic ressession, your stock will drastically boost in value.
Now if you're cash strapped yourself, you should stay away from taking out your 401 K. It all depends on your finances. If your a nebie investor and want to get into the market safely, I'd recommend wizetrade.
You can roll your 401k over into an IRA AND invest the funds in individual stocks if you wish or in a no load, low cost index mutual fund. The latter is the best option for most people.
I agree that cashing out a 401k is not a decision to take lightly and too many people don't understand that!
Its too early to cash out, may be in future
My case is different. I have relocated outside USA and had earned income of $20K in year 2008. Have $11000 in IRA. Now my question is if I cash out my IRA will I still be paying huge taxes ? Shouldn't I get hefty tax refund because I have low income in 2008.
Please advice
Nice hub, have linked one of mine to it as the topic is relevant
Sorry for the delay. To my knowledge, IRA withdrawals are not exempt from penalties for low-income. There is a clause for economic hardship though, for things like medical and mortgage payments. I don't know how you prove the economic hardship.
I am almost 56 years old and going through some difficult times. I am almost 3 months behind in mortgage payments and close to forclosure. I have 300k in equity. I also have a rental home which is fortuntally rented for almost the mortgage payments. The rental has been on the market for a while now and has decreased almost 100k since first putting on the market. I have 100K in my 401k but 2 years ago I took out a loan of 40k. I am considering cashing out most not all of my 401k in order to get my finances back on tract and start living again. Once everything is in order I can then start investing heavely.
Cashing out your entire 401k could really cause a huge tax headache. Have you considered a home equity loan to get by? I have a rental property, too. We take a small loss on it every month, but we also can't sell it.
I agree that rolling over your 401K to your own individual IRA or your new company's 401K is always smarter than cashing out. Good advice here.
How much to you lose, before you cash out 35k,45k 50k, Gm stock fell 31% , they are worth now what the were in 1929, can't continue to loose $, this bull---- what these CEO's have done do this country, just another Enron.
I think the current conditions have been hard on all of us. Hopefully, this turns out to be just like all the other drops and everything recovers (eventually!).
Good luck to everyone going through tough times right now.
Its agood advice about cash out 401K. Thanks for sharing valuable information.
I'm 35. I had 58K in my 401K a month ago,,,now I have 38K and losing more everyday. My husband is thinking I should cash out now and put the cash in the bank in the event that I lose my job or something (due to the economy downturn). Initially, I thought, I'd cross that bridge when I come to it, but with my 401K dropping every day, there may be nothing to consider when and if that day comes. Is this a good idea?
Let's see,many of the people that I have spoken to have lost 30% on their 401K's...on top of that,the Dems. are now discussing taking over 401K's(surprised?)and merging it with social security(think your 401K is hard to cash in now?,just wait).
Get YOUR MONEY out while you're able and buy tangibles-they will always be here,the dollar won't.
six months ago my 401k was $46,000, now it's $24,000 and I'm behind 2months in mortgage and have been unemployed since June. I also have medical cobra payments to make and my wife has been unemployed for over two years due to being disabled. hef disability has run out as has her medical plan's cobra option. she did not qualify for social security or any other disability. how does one roll over into an ira, and how much could i take out without killing myself with penalties and interest charges?
six months ago my 401k was $46,000, now it's $24,000 and I'm behind 2months in mortgage and have been unemployed since June. I also have medical cobra payments to make and my wife has been unemployed for over two years due to being disabled. hef disability has run out as has her medical plan's cobra option. she did not qualify for social security or any other disability. how does one roll over into an ira, and how much could i take out without killing myself with penalties and interest charges?
There are exceptions for removing money from your 401k penalty-free for economic hardships, in certain cases. You can contact any major brokerage or bank for rolling over your IRA. It is pretty simple, just have to fill out one form.
I have been looking afor a reason to do just that: cash out on my 401k. The Enron's and MCI and the many other scandals have caused me to loose faith in this market. I just started putting money in my 401k last year and my objective then was to put 10000 every year. I already had 20000 in my account back in August 2008. Now I find myself with 17500 and some change. I owe 340000 dollars on a house that is now worth 260000 at most. I'm thinking, I could invest in something in Africa and get a far better rate of return on my money than wait allt his time for some smart scroundrels to keep of fucking me inside out.
My plan?
Get the 12000 and buy a truck [2004 Nissan Frontier] for 6000
Send the truck in Africa for another 2000
Put it to work and expect a rate of return of 20 dollars everyday, after maintenance and operations fees.
20 dollars multiplied by 300 days= 6000 dollars a year. Lets say 5000 dollars every year in profits. I'm thinking I would be far better off... Just a though.
Note that these figures are pretty conservative, given that a truck in the third world wil guaranteed to work everyday for the next 20 years.
Why shouldn't I cash out on the 401 k thing?
Yeah Sportsfanx. Who are you to say that money is safer now in a 401k than it would be under the mattress. I would say that in normal times your advice is very correct, but George Bush and the housing ponzi scheme changed the rules. No one has ever really tested FDIC or brokerage insurance plans in a depression. That is the great unknown right now. No one knows what will happen to our financial system.
Good God!
If I had cashed out when I left my job last summer, I would have lost less money than I have since and I would have the cash!
I am tempted to hold on but if the market goes to 5000 then I will have blown my opportunity again!
These are truly trying times.
Well written with good advice. Cashing out your retirement plan should be your last option.
Good Hub. I took a loan out against mine. All worked out real nice. Good Interest Rate as well, better than what the market was offering. Make payments out of my check that are very reasonable.
Hard thing to do but sometimes you have too. Of course, I have lost 30% of its value recently, But, the loan is a better option than cashing out. Its your money, you should be able to access it without paying outrageous fees.
I know many are quite upset about the situation they are in with retirement. However, these situations have happened before. Having your money in a retirement account doesn't mean it has to be invested in the stocks. There are other options out there.
If you look historically at the major stock indexes, they have all achieved major upswings after things reached their bottom. However, none of us will be able to say for sure where the bottom is going to be.
I would think keeping your money "under a mattress" right now could have horrible effects since our benevolent government feels they can print their way out of this mess. All that money they made appear will catch up with us at some point with very high inflation rates. Investing in stocks is generally considered one of the best ways to fight inflation.
Everyone's situation is a bit different, though. What's right for me is not necessarily what's right for everyone else.
I tried my best not to give advice, but to rather show the consequences of withdrawing your retirement money. However, if the bills have to get paid, the bills have to get paid.
I have 8000 dollars in my 401k and it is dropping every day several of my investments are gone and others dont look good and they dont offer any options that arent losing money. should i take my little bit and run before i have none?
My 401K is so low right now, I hope the market rebounds.
Nice hub. Some knowledge to know.
Every 401k projection is based on 8-10% annual return, and when the value of my current 401k has dropped 50% in six months, doesn't that have an impact on the decision to cash out? We may not be seeing 8-10% returns for several years.... any thoughts?
There was a rebound this week in the market. However, some "Experts" claim it could be a short-term trend before things could go back down again.
Hopefully things can stay positive from here.
Good, sound advice. Too many people tend to hit the "panic" button and fail to see the greater dynamic in play. Times seem bad right now, and they are certainly tough. But this economy, and the market conditions that have come from that as a result, is also a cyclical event. No one could see the brighter days ahead after the crash of 1929, or beyond the Great Depression. Yet here we are. The markets are lower than they were 5 years ago, but considerably higher than they were then. So it's not all bad, and the term between then and the more prosperous years just prior to this recent pullback was certainly enough time to make quite a lot of money. If you do not have a need to cash out a 401k now, or in the next 5 years, you'd be wise to leave it alone. The economy is going to improve. The markets are going to go higher. It's not going to happen tomorrow. But it is, indeed, going to happen. The next up-cycle is going to be a massive one.
I´ve got deported, so I wont come back whithin the next 10 years or so... Any accounting can cash it out for me, right?
Cashing out your 401k is always a bad idea and you should try and avoid it all costs.
Am I correct that you can withdraw your deposits in a Roth IRA without penalties?
Cash out a large amount makes reliable for further life
Cash Out 401k
it Was very well written, I support you, welcome to my hub
You can withdraw your contributions from your roth IRA whenever you want, penalty free (since you were already taxed on those contributions). After that, you must meet certain criteria before being able to withdraw penalty free.
There are many reasons you can cash out, though.
If your regular ira/401k suffered, it may be worth a look at converting it into a roth ira.
I did a quick write-up for people looking to withdraw out of their roth ira:
My 401k just keeps losing money and now I no longer have my job, therefore nothing going into the 401k. I think that I should take my losses and just cash it out. It seems that I'm going to lose all of the money anyway with the way my funds are depleting on their own. Can someone give some advice?
With the world being in the shape it is today one can't help but live day to day and not worry so much about the future. Who"s to say that saving a 401k at this time would even be a benefit when you are no longer able to work.
Unless I was going to foreclose on my home or I could not afford to provide food and shelter for my family, I would not cash out my 401K. There are way too many dangerous aspects to this. So many people don't realize the repercussions and end up losing a lot of their money.
great sharing , good advice. thank you
yeah, if the IRS has seized all of you liquid capital( including emergency funds), you've lost your job, an your looking at losing you home and car...plus needing food, thinking about 30yrs down the road no longer applies. If you are dead within a year, retirement savings are not going to do you any good. if you have income or at least means to weather the financial glitch you are in, sure, keep your investments.
Also, if your 401k is losing money with no chance of a rebound, getting some money out is better than nothing. I know people whose 401k when from a value of tens of thousands of dollars to like 50 dollars during the dotcom bust. are you going to tell them cashing out and and getting 30 thousand instead of like 30 dollars would not be smart move?
Just in one word ..... Great
So what if you lose 30%? I lost 50% when the markets tanked in October of 2008...it went right back into the market. I had $90,000 in there that was matched by my employer for 10 years up to 6%, and then the recession hit. I should have taken the $90,000 out, paid the penalty plus the loss percent and banked $53,000 in CASH. It's all paper anyway, and the way this stuff is going how do I know it will be there when I retire? What if they start taxing it as well? If your company does a match, a lot of the money is free anyway. Some people are better off using it now.
I lost my job and and haven't been able to find another. I'll be 55 in about 4 months and we (my husband and I) are sinking fast. We are thinking of cashing in my retirement fund to pay off our home. I hate the thought of losing my home. I only have about $31,000 in there. I want to know if this is a sound thing to do or we try and find another solution.
Not everyone's situation will be the same.
Keep in mind that if you lost your job, you can make certain withdrawals penalty-free. Examples would be for health insurance and making your house payment.
If you need the money, you need the money.
However, if you withdraw all of the money to pay off your home, you would most likely still be liable for penalties. Yet, if you use the money to keep paying your monthly payment, it may be able to be taken out without penalties.
Please consult a tax attorney, accountant or someone you trust who is knowledgeable on the subject.
Bullshit. Cash out and invest in paying off your mortgage and never invest in stocks again. There are too many government sponsored and protected cheaters waiting for you to be stupid and give them your money. This increase in the dow jones is nothing but a big set up for the next harvesting of your money. Don't fall for it. Get out. I am about to get out and pay my mortgage off. Your only goal is to have a place to live that you don't owe money on. If you have that your in very good postion. These fat cats are not going to let you make money in these stocks. Please don't keep falling for this crap. You will be better off putting your money in a savings account and then buying rental property. You won't be rich when you get old but you won't be homeless. Get out while the market is up.
Very wonderful written hub ......
sporsfanX says:
2 years ago
Please leave your comments or suggestions about cashing out your 401k