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If your employee benefits include a 401(k) plan (especially one with a matching program), you’re already starting a nest egg for retirement. Ideally, the money in your 401(k) would remain there until you reach retirement age. But you may need to dip into your nest egg earlier than expected.
Things like unexpected expenses, debt, or economic turmoil can lead to cashing out your 401(k). But before you do so, make sure you fully understand any potential fees, penalties, and requirements. Here are some key things to consider before cashing out your 401(k).
Penalty for 401(k) early withdrawal
A 401(k) is an employer-sponsored retirement plan that most people tap into when they’ve reached retirement age, which the Internal Revenue Service (IRS) considers 59 ½-years-old. If you want to withdraw your money before 59 ½, you’ll be subject to a 10% tax penalty and income tax on the amount you withdraw.1
In some situations, the IRS will waive the fees and penalties for early withdrawal.2 Here are some of the most common exceptions:
- Hardship withdrawals: A hardship withdrawal is an umbrella term used by the IRS for “an immediate and heavy financial need” that requires someone to dip into their retirement savings early.3 This category could include medical bills, funeral expenses, and payments to avoid eviction or foreclosure. Your employer’s plan administrator may not approve your request, especially if you have other financial resources like savings.
- 401(k) loans: Another way to avoid penalties and added fees is to take out a 401(k) loan loan, essentially borrowing your own money. Your employer’s specific plan will detail how much you can borrow and what the terms are – although not all plans will allow loans. If you don’t pay the loan back in time, it could turn into a distribution. That means you’ll end up paying taxes and penalties on the loan.
- Substantially Equal Periodic payments (SEPP): The IRS allows penalty-free withdrawals if you agree to take out a specific equal amount annually over five years or until you turn 59 ½. This withdrawal only kicks in after you’ve stopped working with the employer. Only qualified retirement plans are eligible for this option.4
- Individual retirement account (IRA) rollovers: Instead of cashing out your account, you can roll it over into an IRA. The IRS permits rollovers to an IRA as a way for employees to avoid taxes and penalties. To do this, you would contact your plan administrator and ask them to transfer the funds from your 401(k) to your IRA.
Some other notable exemptions that wouldn’t come with a penalty include: being a member of the military, using the funds for adoption costs, being issued a court order to split your 401(k) money in a divorce, or becoming permanently disabled and no longer being able to work.
How to cash out a 401(k)
Depending on your employer and the type of plan you have, the process to cash out or withdraw money from your 401(k) will differ slightly. But, in general, these are the steps you would take:
- Check with your employer’s human resources (HR) department. Before doing anything, you’ll need to check with your employer to make sure your retirement plan allows an early withdrawal. Even if your employer allows this, you should still familiarize yourself with the fine print to determine what options are available to you.
- Contact your plan provider. Contact your plan provider to notify them that you want to withdraw your money and ask them to send you the necessary paperwork to cash out your account. Your provider should be able to send you everything online or over the phone. (You can typically find your plan provider’s contact information in your plan documents or statements.)
- Obtain required signatures and turn in paperwork. In some cases, you’ll need to collect signatures from HR representatives or plan administrators to confirm you’ve submitted the correct documents and can make an early withdrawal of your 401(k) plan.
Can a 401(k) be cashed out after leaving a job?
After leaving your place of employment, you can cash out your 401(k) early without penalty as long as you’ve turned 55. You’ll still need to pay taxes on the amount you withdraw, but the 10% penalty won’t apply.
If you leave your job and want to cash out before turning 55, you will be subject to penalties unless you meet some of the mentioned exceptions.
Can a 401(k) be cashed out while still employed?
Typically, you can only cash out your 401(k) account if you’re no longer employed with the company that sponsors the plan. The only exceptions are to take out a 401(k) loan or request a hardship withdrawal (as explained above).
Pros and cons of cashing out a 401(k) early
Here’s a snapshot of the advantages and disadvantages of cashing out a 401(k) before the age of 59 ½:
| Pros | Cons |
| You can use the money to pay off debts and for unexpected expenses. | Early withdrawals will be taxed as income by the IRS and you’ll have a 10% penalty fee. |
| Cashing out gives you immediate access to your funds. | Funds removed from the account are no longer protected against bankruptcy or creditors seizing your assets. |
Should I cash out my 401(k)
Deciding to cash out your 401(k) is a personal choice you should carefully consider. If possible, you should wait until you’ve reached the age of 59 ½. If you need the money right away, dipping into your retirement savings is an option.
Try to withdraw only the bare minimum you need because you’ll need to pay income taxes on that amount, and may face a penalty fee. It’s a good idea to consult a financial advisor to make an informed decision.
Before cashing out your 401(k), consider alternative ways to get money quickly.
- Take out a personal loan, home equity loan, or line of credit.
- Take on a side hustle for supplemental income.
- Downsize to lower expenses.
- Pull from your savings account(s).
- Borrow from a friend or family member.
- Take out an emergency loan.
- Take a cash advance on a credit card.
FAQs
Who do I contact to cash out my 401(k)?
When you’re ready to cash out your 401(k), you’ll contact your plan provider. You can typically reach your provider via phone or through an online portal. Let them know how much you want to withdraw, and they’ll send you the money through check or direct deposit.
When can I cash out my 401(k)?
The minimum age requirement is 59 ½, which means you can cash out your 401(k) without any penalties or fees once you’ve reached that age. If you decide to cash out before then, you can do so but know that you will need to give the IRS a cut.
How long does it take to cash out 401(k)?
The time it takes to cash out your 401(k) will depend on your plan administrator and employer. You can typically expect to wait a few weeks before you have the money in your possession. Some plans may limit the amount you can take out in a given time. Consult with your plan documents to learn what guidelines they follow.
Weighing the options with your 401(k)
Ideally, you can let your 401(k) grow. But if your situation depends on the money in your account, you could cash it out early. Try to speak with a professional before prematurely cashing out your 401(k) or making other serious financial arrangements.
Consider taking out a personal loan to pay for unexpected expenses. Get the 101 on how personal loans work.
