How To Cash Out Retirement


How Do You Take A Withdrawal Or Loan From Your Fidelity 401

How to Wreck Your Retirement #3: Cash Out Your 401(k)

If youve explored all the alternatives and decided that taking money from your retirement savings is the best option, youll need to submit a request for a 401 loan or withdrawal. If your retirement plan is with Fidelity, log in to NetBenefits®Log In Required to review your balances, available loan amounts, and withdrawal options. We can help guide you through the process online.

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What About My Current 401 Can I Access That Money At Any Time

You cannot take a cash 401 withdrawal while you are currently working for the employer that sponsors the 401 unless you have a major hardship. That being said, you can cash out your 401 before age 59 ½ without paying the 10% penalty if:

  • You become completely and permanently disabled
  • You incur medical expenses that exceed 7.5% of your gross income
  • A court of law orders you to give the funds to your divorced spouse, a child, or a dependent
  • You retire early in the same year you turn 55 or later
  • You are permanently laid off or terminated, you quit, or you retire and have established a payment schedule of regular withdrawals in equal amounts for the rest of your expected natural life.
  • Additionally, you can cash out your 401 and pay the 10% penalty if you need funds for certain financial hardships and have no other source of funds. These hardships include:

  • The purchase of your primary home
  • Higher education tuition, room and board, and fees for the next twelve months for you, your spouse, or your dependents or children
  • To prevent eviction from your home or foreclosure on your primary residence
  • Tax-deductible medical expenses that are not reimbursed for you, your spouse, or your dependents
  • Other severe financial hardship
  • Even if you meet these requirements, cashing out your 401 should always be seen as an absolute last resort.

    Our Take: When Can You Withdraw From Your 401k Or Ira Penalty

    There are a number of ways you can withdraw from your 401k or IRA penalty-free. Still, we recommend not touching your retirement savings until you are actually retired. Compounding is a huge help when it comes to maximizing your retirement savings and extending the life of your portfolio. You lose out on that when you take early distributions. To see how much compounding can affect your 401k account balance, check out our article on the average 401k balance by age.

    We understand that its always possible for unforeseen circumstances to arise before you reach retirement. Being aware of the exceptions allows you to make informed decisions and possibly avoid paying extra fees and taxes.

    To take control of your finances, a good place to start is by stepping back, getting organized, and looking at your money holistically. Personal Capitals free financial dashboard will allow you to:

    The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

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    What You Can Do To Maximize Your Earning Potential

    Resist the temptation to cash out. Instead, roll over your account balance into your current retirement plan. Consolidating your retirement plan assets may make account management easier and keeps your money working for you until retirement.

    Please note that there may be some reasons why you would not want to consolidate accounts, including that you are comfortable with the existing plan and think it is a good one and your new plan offers fewer investment options or investment options that don’t meet your needs.

    Keep your retirement savings working for you. Take advantage of account consolidation.

    1 Eliminating Friction and Leaks in Americas Defined Contribution System, Boston Research Group, April 2013.

    2 Income taxes are due on contributions and earnings from pre-tax accounts. Income taxes are not due on earnings from after-tax Roth accounts, provided the account has met the following conditions: 1) five-year holding period, and 2) one of these qualifying events: age 59½, disability, or death. For more information, consult a qualified tax advisor.

    3 If your current plan does not allow rollovers in, you also have the option to roll over the money into an IRA, which will preserve the power of tax-deferred potential growth for you.

    Variable products are co-distributed by affiliates Equitable Advisors, LLC and Equitable Distributors, LLC. Equitable, Equitable Advisors, and Equitable Distributors do not provide tax or legal advice.

    You’ll Owe Taxes And Possible Penalties

    Are you on track for retirement? Do the math

    If you cash in your 401 plan, and you have not yet reached age 59 1/2, then the dollar amount you withdraw will be subject to ordinary income taxes and a 10% penalty tax.

    If you are not yet age 59 1/2, your plan will likely enforce a required 20% amount withheld from any balance that you cash out to cover federal taxes. So, for every $1,000 you cash in, you would receive about $800. The other $200 would be sent to the IRS by your 401 administrator. At the end of the year, the 401 plan will send you a tax form called a “1099R” that shows the amount of taxes withheld on your behalf.

    In general, you should not cash out your 401. Instead, roll it over into an IRA. When you calculate how much money you would lose by cashing out the account, the choice will become clear. Use an early-withdrawal calculator to help you see how much a withdrawal will cost you.

    When you file your income tax return, you must include any cashed-out amounts from your 401 plan as regular income, along with your other sources of income. The amount flows into your tax return on the first page, and, based on your total income and deductions, you will either owe additional tax or receive a refund.

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    How To Withdraw Money From Your 401

    The 401 has become a staple of retirement planning in the U.S. Millions of Americans contribute to their 401 plans with the goal of having enough money to retire comfortably when the time comes. Whether youve reached retirement age or need to tap your 401 early to pay for an unexpected expense, there are various ways to withdraw money from your employer-sponsored retirement account. A financial advisor can steer you through these decisions and help you manage your retirement savings.

    What Proof Do You Need For A Hardship Withdrawal

    Documentation of the hardship application or request including your review and/or approval of the request.Financial information or documentation that substantiates the employees immediate and heavy financial need. This may include insurance bills, escrow paperwork, funeral expenses, bank statements, etc.

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    How To Cash Out Your 401k And What To Consider

    4-minute readMay 18, 2021

    One of the surest ways to create a comfortable retirement for yourself is to begin saving early on in your career. A 401 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, its not uncommon to wonder how to cash out your 401 as well. Here, well take a closer look at the process of cashing out a 401 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.

    Exceptions To The Penalty


    The IRS permits withdrawals without a penalty for certain specific uses. These include a down payment on a first home, qualified educational expenses, and medical bills, among other costs.

    As with the hardship withdrawal, you will still owe the income taxes on that money, but you won’t owe a penalty.

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    K Withdrawal Rules: How To Avoid Penalties

    401k plans, IRAs and other tax-advantaged retirement savings accounts are common ways to save for retirement, and millions of Americans pour money into them every year. Its generally wise to avoid withdrawing money from your 401k, as there are often hefty penalties and taxes to consider for early withdrawals.

    Sometimes, however, unplanned circumstances force people to withdraw funds from their 401k early. So if you find yourself in a place where you need to tap your retirement funds early, here are some rules to be aware of and some options to consider.

    What Is A 401 Early Withdrawal

    First, lets recap: A 401 early withdrawal is any money you take out from your retirement account before youve reached federal retirement age, which is currently 59 ½. Youre generally charged a 10% penalty by the Internal Revenue Service on any withdrawals classified as earlyon top of any applicable income taxes.

    If youre making an early withdrawal from a Roth 401, the penalty is usually just 10% of any investment growth withdrawncontributions are not part of the early withdrawal fee calculation for this type of account.

    But the entire account balance counts for calculating the fee if youre making an early withdrawal from a traditional 401. These rules hold true for early distributions from a traditional IRA as well.

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    What You Should Know About Withdrawing Retirement Funds Early

    Is your retirement money only for retirement? Ideally, yes. But its your money, so the decision of what to do with is ultimately yours. During financially challenging times, its easy to understand the temptation to tap into retirement funds earlier than planned. But heres what you should know before you consider accessing retirement savings early.

    What Are Alternatives

    How Much to Save for Retirement

    Because withdrawing or borrowing from your 401 has drawbacks, it’s a good idea to look at other options and only use your retirement savings as a last resort.

    A few possible alternatives to consider include:

    • Using HSA savings, if it’s a qualified medical expense
    • Tapping into emergency savings
    • Transferring higher interest credit card balances to a new lower interest credit card
    • Using other non-retirement savings, such as checking, savings, and brokerage accounts
    • Using a home equity line of credit or a personal loan3
    • Withdrawing from a Roth IRAthese withdrawals are usually tax- and penalty-free

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    Making A Hardship Withdrawal

    If you are in an immediate and substantial financial need, the IRS allows you to make early withdrawals if you declare hardship and if your case fits one of the situations which are determined by the law.

    In case of hardship, you may be able to access some or all of your funds depending on the situation and your plan provider. You usually wont need to pay any penalties. We will go into more detail about hardship withdrawals later in this article.

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    How Do You Qualify For The Exemption

    • You, your spouse, or dependent was diagnosed with COVID-19 by a CDC-approved test, OR
    • You experienced adverse financial consequences as a result of certain COVID-19-related conditions, such as a delayed start date for a job, rescinded job offer, quarantine, lay off, furlough, reduction in pay or hours or self-employment income, the closing or reduction of your business, an inability to work due to lack of childcare, or other factors identified by the Department of Treasury.

    is one that meets this criteria and is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020.

    Traditional Rollover Sep And Simple Iras

    How to Cash out your 401(k), IRA & Retirement Accounts to Buy a Home

    If you are considering a withdrawal from one of these types of IRAs before age 59½, it will be considered an early distribution by the IRS.

    In many cases, youll have to pay federal and state taxes. There may also be a 10% penalty unless you are using the money for exceptions such as a first-time home purchase, birth or adoption expense , qualified education expense, death or disability, health insurance , and some medical expenses. A 25% penalty may apply if you take a distribution within the first 2 years of opening a SIMPLE IRA.

    If any of these situations apply to you, then you may need to fill out specific IRS forms. Always consult your tax advisor about your specific situation.

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    Tax Implications Of Cashing Out A 401 After Leaving A Job

    The following are some tax rules regarding your old 401:

    • When you leave your 401 account with your old employer, you wont need to pay taxes until you choose to withdraw the funds.

    • Even when you roll over your old 401 account to your new employer, you need not pay any taxes.

    • At the time of your 401 distributions, you will be liable to pay income tax at the prevailing rates applicable for such distribution.

    • If you havent reached the age of 59 ½ years at the time of distribution, you may be liable to pay a premature withdrawal penalty of 10%, subject to certain exceptions.

    • Distributions from a designated Roth account are tax-free after you reach the age of 59 ½ years, provided your account is at least five years old.

    Although legally, you have every right to liquidate your old 401 account and cash out the entire funds, doing so would reduce your savings for the retired life. Additionally, the distributions will add up to your annual taxable income.

    Need further help? Talk to our experts for professional advice on anything and everything related to 401.

    Article By

    The Human Interest Team

    We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401 to your employees. Human Interest offers a low-cost 401 with automated administration, built-in investment advising, and integration with leading payroll providers.

    High Unreimbursed Medical Expenses

    In case of medical expenses that are higher than 7.5% of your AGI , you are allowed to cash out enough funds from your 401 plan to cover them.

    You can use this for medical bills for yourself, your spouse, or any of your qualified dependents. To avoid penalty, youll have to withdraw the money the same year when the medical bills are incurred.

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    Build An Emergency Fund

    This should be the foundation of your financial plan and experts recommend having about six months worth of expenses saved. You can park this money in a high-yield savings account to earn more interest than you would in a traditional checking account. An emergency fund should help you manage most of lifes curveballs.

    How Do I Cash Out A Tax

    Make Your Money Last Longer in Retirement

    Cashing out a tax-sheltered annuity early presents a minor challenge. The institution with which you established the TSA account derives profit from holding the principal, and it has agreed to pay interest to you for the privilege of using your money. If you pull your funds out early, the bank profits less. Most institutions have set up processes and/or penalties to discourage early withdrawal.

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    Dividends May Be The Better Optiontax

    Cash and investments within a corporation are an accumulation of after-tax business profit. Corporate tax payable by small businesses on business income generally ranges from 9% to 13% currently, depending on the province or territory as well as other factors. A shareholder of a corporation can receive a dividend on their shares instead of a salary.

    A dividend is a distribution of after-tax corporate profits. It is taxed at a lower rate personally to reflect the corporate tax already paid when the business income was earned.

    Typically, dividends are taxed at about a 10% lower rate than salary, but the rate does range, depending on income and province or territory of residence. So, paying dividends is not only more appropriate for retirees, but also typically less taxing.

    To receive dividends, one must be a shareholder of the corporation. If you have a spouse or common-law partner who is not a shareholder of your corporation, you may want to consider adding them as one.

    If the corporation is no longer earning business income, you are 65 or older, or your spouse was active in the business, you may be able to pay them dividends without restrictions. But you should get tax advice on Tax on Split Income rules that may cause dividends to be taxed at a higher tax rate.

    In other cases, a capital dividend can be declared but not paid out and converted to a shareholder loan that can be withdrawn tax-free later.

    Making The Numbers Add Up

    Put simply, to cash out all or part of a 401 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 . 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 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.

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