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If your employee benefits include a 401(k) plan (especially one with a matching program), you may be well on your way to building 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 access your retirement funds earlier than expected.

Things like unexpected expenses or paying off debt might prompt you to cash out your 401(k) or take a loan against your retirement savings. But before you do so, be aware of any potential fees or interest rates associated with a loan and any early withdrawal penalty implications or other requirements. Before cashing out your 401(k), here are some key things to consider.

Understanding 401(k) loans

Retirement plans may allow employees to take a loan against their 401(k) balances. Here’s a quick rundown of how 401(k) loans work.

  • You can borrow up to 50% of your vested account balance or $50,000, whichever is less.
  • Generally, 401(k) loans must be repaid within five years, with payments made at least quarterly.
  • Plan administrators can establish the rules and requirements for 401(k) loans, including requiring spousal consent for married plan participants.1

While your 401(k) plan might allow you to take loans, they’re not required to. If you’re unsure whether your plan allows loans, you can contact your plan administrator for more details.

Pros and cons of 401(k) loans

Taking a loan against your 401(k) might be preferable to getting another type of loan, but there are some potential disadvantages to keep in mind.

ProsCons
A good credit score is not required for approval, and missed payments to a 401(k) loan won’t negatively impact your credit.Borrowing from a 401(k) can cause you to miss out on investment growth for retirement.
401(k) loan interest rates are typically low, and interest is paid back to your retirement account rather than a lender.Changing jobs renders the remaining balance due on the loan payable in full immediately.
You can get access to cash for short-term needs or longer-term goals.If you fail to repay a 401(k) loan on time, the IRS can treat it as a taxable distribution and assess early withdrawal penalties.

How to cash out a 401(k)

Cashing out a 401(k) is different from a loan. When you take cash out of your 401(k), you don’t pay it back. Instead, it’s treated like a withdrawal.

You might consider cashing out a 401(k) as a last resort if you need cash for medical expenses, home repairs, or other unplanned expenses. Keep in mind, however, that cashing out a 401(k) will leave you with less money for retirement.

Depending on your employer and plan type, 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:

  1. Check with your employer’s human resources (HR) department. Before taking further steps, you’ll need to check with your employer to make sure your retirement plan allows an early withdrawal. Even if your employer allows this, read the fine print to determine what options are available to you.
  2. 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.)
  3. Get 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. You can make an early withdrawal of your 401(k) plan.

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:

ProsCons
You can use the money to pay off debts and for unexpected expenses.An early withdrawal penalty may apply, along with ordinary income tax.
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.
Early withdrawal rules don’t apply once you pass the 59 1/2 mark.Cashing out a 401(k) shrinks your account balance, which can affect your long-term retirement savings goals.

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. Your tax bracket influences the tax rate you’ll pay for early distributions.2

In some situations, the IRS will waive the early withdrawal penalty.3 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.4 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, essentially borrowing your own money. Your employer’s specific plan will detail how much you can borrow and the terms – although not all plans will allow loans. It could turn into a distribution if you don’t pay the loan back in time. 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.5
  • Individual retirement account (IRA) rollovers: Instead of cashing out your account, you can roll it into an IRA. The main difference between a 401(k) vs. IRA is that one is offered by an employer and the other is not. To roll your workplace retirement savings over, you’d 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.

Can a 401(k) be cashed out after leaving a job?

It’s possible to cash out a 401(k) after leaving your job. Whether you pay an early withdrawal penalty depends largely on your age. No early withdrawal penalty applies if you’re 59 1/2 or older. You can also avoid the penalty if you make an early withdrawal in the year you turn 55, and you leave your job.6

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).

Are you trying to save money? Take advantage of a Chime high-yield savings account to watch your money grow.

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.

Accessing your retirement savings is an option if you need the money right away. 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. If you can, consult a financial advisor to make an informed decision.

Alternatives to a 401(k)

Cashing out a 401(k) is just one way to access cash when needed, and you might have other options.

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.
  • Look for odd jobs or side gigs that offer same-day or instant pay.
  • Downsize and review your budgeting plan to lower expenses.
  • Pull from your savings account(s).
  • Borrow from a friend or family member.
  • Take out an emergency loan.
  • Consider an early withdrawal from a Roth IRA instead.

There are some caveats to keep in mind with each of these options. For example, if you’re considering an emergency loan or personal loan, shop around to find the best interest rates.

Personal finance experts might say that withdrawing isn’t that much more appealing than cashing out a 401(k), as you’re also shrinking your retirement nest egg. Research suggests that early withdrawals from a 401(k) can increase the likelihood of having inadequate savings when it’s time to retire.7

You could borrow from friends and family, but that has some advantages and disadvantages. Lending money to family members or friends could strain the relationship if the borrower fails to pay back what they owe.

Looking at each option individually to assess the pros and cons can help you determine the most realistic solution for your situation.

Weighing the options with your 401(k)

Here’s the bottom line on cashing out a 401(k) plan: it’s better to let your money grow for as long as possible until you need it. But if your situation depends on the money in your account, you could cash it out early.

Should you decide to cash out your plan, weigh where you keep the money. For example, you might deposit it into a high-yield savings account or move it to an investment account at a brokerage.

You can also consider taking out a personal loan to pay for unexpected expenses. Learn the basics of how personal loans work.

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’re cashing out a traditional 401(k), you’ll need to pay ordinary income tax on withdrawals. Should you decide to cash out before then, the IRS will expect you to pay income tax along with an early withdrawal penalty. The same rules apply to early withdrawals from a Roth 401(k).

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 your plan documents to learn what guidelines they follow.

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Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank, N.A. and Stride Bank, N.A. (“Banks”). Banks are not responsible for the accuracy of any content provided by author(s) or contributor(s).

1 Information from the IRS's Retirement Topics - Plan Loans as of October 3, 2023: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans

2 Information from IRS's Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRAs as of October 3, 2023: https://www.irs.gov/taxtopics/tc558

3 Information from IRS's Retirement Topics - Exceptions to Tax on Early Distributions as of October 3, 2023: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions

4 Information from IRS's Retirement Plans FAQs regarding Hardship Distributions as of October 3, 2023: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-hardship-distributions

5 Information from IRS's Substantially Equal Periodic Payments as of October 3, 2023: https://www.irs.gov/retirement-plans/substantially-equal-periodic-payments

6 Information from the IRS's Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs as of October 11, 2023: https://www.irs.gov/taxtopics/tc558

7 Information from the National Association of Business Economics Pre-retirement use of 401(k) funds as of October 11, 2023: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7994916/pdf/11369_2021_Article_214.pdf

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