Cashing Out 401k In Between Jobs

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By Sean A. Kelly

Saving up for retirement may be one of many financially smart things young workers do especially if they have already started working from a young age. However, many young workers now are already cashing out 401k retirement funds especially when changing jobs. This may be because the IRS allows a cash-out when you quit your job. Of course, at the time of withdrawal you may be required to be separate from service to your employer and your termination date may have to be verified by your former employer when you are making your withdrawal request. Previously 401k withdrawals only have been allowed to employees older than 59 years but now younger employees can do so as well.

In general, cashing out 401 when you are changing jobs is not a good idea. This is why many experts suggest that you explore other options or ways to obtain money before resorting to dipping into your retirement fund. Many financial experts may advice against doing so. After all you may have the options of leaving your former 401k plan untouched, rolling it into your new employers 401k plan and also rolling your 401k to an Individual Retirement Account (IRA). However, if you do decide to cash it out anyway, you may have to pay penalties for it. Your financial advisor may suggest that the best way might be to roll your account to your new employers 401k plan because it may be more beneficial for you in the long run.

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If you still wish to cash out 401k, you may want to bear in mind that doing so is not without consequences. Basically the idea of a retirement fund is to set aside a certain amount of money every month so that it would accumulate and grow over time. Even if you stop contributing to your 401k fund, the amount may still grow because of the rate of return on your account balance every year. So if you withdraw that money before it even had a chance to grow, you may be jeopardizing your own future. There will come a time when you could no longer work to support yourself so you may have to rely solely on the retirement fund you have set up when you first started working. If you tap out some or all of that money before you retire you may have to find an alternative source of income to support yourself after retiring.

Another repercussion of an early 401k withdrawal is that you may have to pay penalty or even income tax for it. 401k taxes may actually be quite a lot. You may think that 10% is a rather small percentage but when you translate it into actual dollars the amount could be more substantial than you think. At the same time you may also be required to make estimated tax payments to avoid withholding penalties. For example, if you decide to withdraw $20,000 from your 401k account you may have to pay $2,000 in taxes for the early withdrawal you made. Just imagine what you could have done with the $2,000 that you already have in hand if you did not have to hand it over to the federal government. On top of that, you may even be required to pay more money for penalties and other costs.

Ideally, you are not supposed to touch your 401k account until you are 59 years old. However, there may be circumstances that could force you to take out an amount of money from your 401k account. Many financial experts may advice against an early 401k withdrawal unless you absolutely have to. Perhaps it would be better for you to see if a less expensive and damaging alternative to help you with your financial difficulties exists before withdrawing early from your retirement fund.

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Posted on March 8th 2018 in Financial Services

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