Couple planning for their retirement.

How To Cash Out Your 401k And What To Consider

4-minute readApril 11, 2021

One of the surest ways to create a comfortable retirement for yourself is to begin saving early on in your career. A 401(k) plan – a type of financial contribution plan which allows you to put a percentage of your salary into an account whose investment gains remain tax-free until funds are withdrawn – presents one of the most popular vehicles for doing so. Even better, employers will often match the amount of money set aside up to a certain amount, effectively guaranteeing you free income.

However, in the event that access to money is needed, especially in the wake of a large or unexpected expense, it’s not uncommon to wonder how to cash out your 401(k) as well. Here, we’ll take a closer look at the process of cashing out a 401(k) early, how long it takes to get access to money, and the pros and cons of doing so, including how much early withdrawal before retirement may cost you.

Are You Eligible To Cash Out Your 401(k)?

Before you can cash out your 401(k), or get the most lucrative return on your investment, there are certain criteria that you must meet. In this section, we take a closer look at these prerequisites, and what you need to know in order to avoid inadvertently making costly mistakes. 

Still Employed 

If you’re still employed by the company that sponsors your 401(k) plan, unfortunately, you won’t be eligible to cash in your plan and savings. Instead, you’ll want to check to see if your plan offers either a 401(k) loan or allows opportunities for hardship withdrawals in the event that you find yourself in special circumstances (e.g. subject to extraordinary medical expenses or major financial setbacks). Whatever the situation though, withdrawals should be used judiciously, as you may find yourself having to pay taxes and penalty fees on your money. Likewise, the more money you can leave in your 401(k), the better off you’ll be, as retirement investments take time to compound and grow.

No Longer Employed

If you’re no longer employed by the firm that sponsors your 401(k) plan, congratulations – you’re eligible to gain access to these funds. Options available to you include the choice to cash out the plan or rollover your 401(k) plan balance into an IRA. Rolling over the balance into an IRA is a non-taxable transaction, which allows you to avoid paying penalty fees or income taxes if filed in keeping with legal regulations. Doing so is often a preferred option, as if you’re under age 59 1/2, in most cases, you will incur a 10% early withdrawal penalty on any money withdrawn, and you will also have to pay income tax upon the amount you receive.

Making The Numbers Add Up 

Put simply, to cash out all or part of a 401(k) retirement fund without being subject to penalties, you must reach the age of 59½, pass away, become disabled, or undergo some sort of financial “hardship” (if the plan provides for this last exception). Whatever the circumstance though, if you choose to withdraw funds early, you should prepare yourself for the possibility of funds becoming subject to income tax, and early distributions being subjected to additional fees or penalties. Be aware as well: Any funds in a 401(k) plan are protected in the event of bankruptcy, and creditors cannot seize them. Once removed, your money will no longer receive these protections, which may expose you to hidden expenses at a later date.

Withdrawing Money Early From Your 401(k)

The method and process of withdrawing money from your 401(k) will depend on your employer, and which type of withdrawal you choose. As noted above, the decision to remove funds early from a retirement plan should not be made lightly, as it can come with financial penalties attached. However, should you wish to proceed, the process is as follows.

Step 1: Check with your human resources (HR) department to see if the option to withdraw funds early is available. Not every employer allows you to cash in a 401(k) before retirement. If they do, be sure to check the fine print contained in plan documents to determine what type of withdrawals are available, and which you are eligible for.

Step 2: Contact your 401(k) plan provider (contact information can be found on your plan statements) and request that they send you the information and paperwork needed to cash out your plan, which should be promptly completed. Select providers may be able to facilitate these requests online or via phone as well.

Step 3: Obtain any necessary signatures from plan administrators or HR representatives at your former employer affirming that you have filed the necessary paperwork, executed the option to cash in your 401(k) early, and are authorized to proceed with doing so. Note that depending on the size of the company, this may take some time, and you may need to follow up directly with corporate representatives or plan administrators at regular intervals.

How Long Does It Take To Cash Out A 401(k)

While the amount of time it takes to receive money differs by plan, administrator and employer, you can often expect to wait several weeks minimum to receive your funds. Some plans may also be bound by rules that prohibit them from distributing these funds more than once a quarter or year, extending this time horizon to 30 – 90 days or more.

As 401(k) plans are highly regulated, and subject to strict governance, it can often take a considerable amount of time to ensure that proper guidelines are followed. Complete paperwork must also be in hand in order for requests to process. Noting that any funds withdrawn are unlikely to become immediately available, be sure to consult your summary plan description document to learn more about the rules of your plan, and how long it can take to receive disbursements.

Age Before Wealth 

Ironically though, the longer you wait to withdraw these sums, the better off you’ll be anyway. That’s because if you are under the age of 59½, withdrawals from a 401(k) are subject to a 10% early withdrawal penalty, and you will be required to pay normal income taxes on those funds. A 20% sum may also be withheld by your plan provider to cover federal taxes. In addition, if you’re over 55 years old, but younger than 59½, you may still find yourself able to avoid the penalty tax if you terminated your employment after turning 55.

Doing The Math

Borrowing from your 401(k) can be tempting. Before deciding when and how to cash out a 401(k) though, make sure to arm yourself with the facts. Doing so can help you avoid penalties and get the most from your investments. It can also equip you with all the insights that you need to decide when cashing in a 401(k) makes the most financial sense.

Create a Rocket Account today.

Track your credit, manage your personal finances and get ready to buy a home.

Apply For A Mortgage Online

NMLS #3030