If you have fallen on hard times, or have an unexpected emergency expense, you may be tempted to withdrawal from, or cash out your 401k retirement plan. For many people, aside from their home, their 401k and other retirement funds are their largest source of liquid capital.
It is important to think twice before you cash out or withdrawal from your 401k, as the taxes and fees associated with early withdrawal can eat away at your savings, and the loss of future earnings can put your financial future in jeopardy.
How much will the tax be on cashing out a 401k? When you cash out a 401k, the amount you withdrawal is subject to your personal income tax rate. This means you could pay as much as 30% in income tax alone. Add to that the 10% early withdrawal penalty for withdrawing prior to turning 59½, and this is a serious blow to your funds.
Your Options For Your 401k Account
You do have some options if you are leaving a job, and are wondering what to do with an old 401k. You can always leave your 401k where it is, which is by far the easiest option. While this may be the easiest option, it is not always the best, as you run the risk of your investments getting stale, and not maximizing your earnings potential.
You can also rollover your 401k to your new employer’s plan, although you may run into the same shortcomings with your new 401k that you experienced with your old plan including limited investment options, and high fees.
Many financial professionals recommend that you use this opportunity to rollover your 401k account to a traditional or Roth IRA. These retirement plans are easy to open, with many excellent and affordable IRA options available online at brokers such as ETrade and Zecco. By investing your funds in an IRA, you are giving yourself an opportunity to invest in a broader rage of securities and asset classes, and therefore achieve better diversification, and potentially larger returns.
How Much Will The Tax Be On Cashing Out A 401k?
How much will the taxes be on cashing out a 401k? You do have the option of cashing out your 401k and paying the penalties and taxes, although this option should be considered as a last resort. Not only can the taxes and fees on an early withdrawal costs you hundreds if not thousands of dollars, but the potential future losses associated with withdrawing your investment capital could push that amount even higher.
If you have been laid off from your job, or have no current income, you may feel pressure to cash out your 401k to pay your bills and prevent foreclosure. The major problem with this strategy is that more often than not it is only a temporary fix, and you are left in no better financial shape with a depleted retirement fund.
It is important to research additional options to obtain capital such as a home-equity loan or refinancing as means of getting by in lieu of cashing out your 401k. There are also firms that can assist you in dealing with your mortgage lender to re-negotiate your loan terms and help lower your payments.
Consult with a financial adviser such as the experts at online broker ETrade before proceeding with any loan modifications, as these may not be right for every circumstance. Your advisers may recommend a variety of strategies based on your specific circumstances, including a combination of withdrawing a portion of your funds and rolling over the rest.