It's fairly easy to put money into a 401(k), but getting your money out can be a different story. That is, unless you’re at least 59½ years old — that’s when the door swings wide open for a qualified 401(k) withdrawal.
But the current high inflation, rising interest rates and rocky stock market have some investors itching to cash out their 401(k)s early. In a November 2022 Wells Fargo & Company study, 42% of investors interviewed said they wanted to cash out of their investments, and 29% said they would cash out a 401(k) or IRA if they could avoid paying penalties.
If you're thinking of cashing out a 401(k) before you reach 59½, proceed with caution. You could pay a steep price.
» Dive deeper: What to do when the stock market is crashing
Three consequences of a 401(k) early withdrawal
Taxes will be withheld. The IRS generally requires automatic withholding of 20% of a 401(k) early withdrawal for taxes. So if you withdraw $10,000 from your 401(k) at age 40, you may get only about $8,000. Keep in mind that you might get some of this back in the form of a tax refund at tax time if your withholding exceeds your actual tax liability.
The IRS will penalize you. If you withdraw money from your 401(k) before you’re 59½, the IRS usually assesses a 10% tax as an early distribution penalty. That could mean giving the government $1,000, or 10% of that $10,000 withdrawal, in addition to paying ordinary income tax on that money. Between the taxes and penalty, your immediate take-home total could be as low as $7,000 from your original $10,000.
You may lock in your losses. That may be especially true if the market is down when you make the early withdrawal. “If you're pulling funds out, it can severely impact your ability to participate in a rebound, and then your entire retirement plan is offset,” says Adam Harding, a certified financial planner in Tempe, Arizona. That may mean less money for your future.
How long does it take to cash out a 401(k) after leaving a job?
Depending on who administers your 401(k) account, it can take between three and 10 business days to receive a check after cashing out your 401(k). If you need money in a pinch, it may be time to make some quick cash or look into other financial crisis options before taking money out of a retirement account.
If you need to cash out or take an early 401(k) withdrawal
1. See if you qualify for an exception to the 10% tax penalty
Generally, the IRS will waive it if any of these situations apply to you:
You choose to receive “substantially equal periodic” payments. Basically, you agree to take a series of equal payments (at least one per year) from your account. They begin after you stop working, continue for life (yours or yours and your beneficiary’s) and generally have to stay the same for at least five years or until you hit 59½ (whichever comes last). A lot of rules apply to this option, so be sure to check with a qualified financial advisor first.
You leave your job. This works only if it happens in the year you turn 55 or later (50 if you work in federal law enforcement, federal firefighting, customs, border protection or air traffic control).
You have to divvy up a 401(k) in a divorce. If the court’s qualified domestic relations order in your divorce requires cashing out a 401(k) to split with your ex, the withdrawal to do that might be penalty-free.
Other exceptions might get you out of the 10% penalty if you're cashing out a 401(k) or making a 401(k) early withdrawal:
You become or are disabled.
You rolled the account over to another retirement plan (within a certain time).
Payments were made to your beneficiary or estate after you died.
You gave birth to a child or adopted a child during the year (up to $5,000 per account).
The money paid an IRS levy.
You were a victim of a disaster for which the IRS granted relief.
You over-contributed or were auto-enrolled in a 401(k) and want out (within certain time limits).
You were a military reservist called to active duty.
Finally, a provision in the Secure 2.0 Act, which became law at the end of 2022 and revised many of the government's rules for retirement plans, will allow special emergency distributions of up to $1,000 per year beginning in 2024.
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2. See if you qualify for a hardship withdrawal
A hardship withdrawal is a withdrawal of funds from a retirement plan due to “an immediate and heavy financial need.” A hardship withdrawal usually isn't subject to penalty.
Generally, these things qualify for a hardship withdrawal:
Medical bills for you, your spouse or dependents.
Money to buy a house (but not to make mortgage payments).
College tuition, fees, and room and board for you, your spouse or your dependents.
Money to avoid foreclosure or eviction.
Funeral expenses.
Certain costs to repair damage to your home.
How to make a hardship withdrawal
Your employer’s plan administrator usually decides if you qualify for a hardship withdrawal. You may need to explain why you can’t get the money elsewhere. You usually can withdraw your 401(k) contributions and maybe any matching contributions your employer has made, but not normally the gains on the contributions (check your plan). You may have to pay income taxes on a hardship distribution, and you may be subject to the 10% penalty mentioned earlier.
3. Consider converting your 401(k) to an IRA
Individual retirement accounts —known as IRAs — have slightly different withdrawal rules from 401(k)s. You might be able to avoid that 10% 401(k) early withdrawal penalty by converting an old 401(k) to an IRA first. For example:
There’s no mandatory withholding on IRA withdrawals. That means you might be able to choose to have no income tax withheld and thus get a bigger check now. (You still have to pay the tax when you file your tax return.) If you’re in a desperate situation, rolling the money into an IRA and then taking the full amount out of the IRA might be a way to get 100% of the distribution. This strategy may be valuable for people in low tax brackets or who know they’re getting refunds. (See what tax bracket you're in.)
You can take out up to $10,000 for a first-time home purchase. If that's why you need this cash, converting to an IRA first may be a better way to access it.
School costs could qualify. Withdrawals for college expenses could be OK from an IRA, if they fit the IRS’ definition of qualified higher education expenses .
» Learn more: IRA vs. 401(k): How to Choose
4. Take out the bare minimum when cashing out a 401(k)
“Anytime you take early withdrawals from your 401(k), you’ll have two primary costs — taxes and/or penalties — which will be pretty well-defined based on your age and income tax rates, and the foregone investment experience you could have enjoyed if your funds remained invested in the 401(k). This total cost should be considered in detail before making early withdrawals,” Harding says.
Don’t make a 401(k) early withdrawal just because you're nervous about losing money in the short term. It's also not a great idea to cash out your 401(k) to pay off debt or buy a car, Harding says. Early withdrawals from a 401(k) should be only for true emergencies, he says.
Even if you manage to avoid the 10% penalty, you probably will still have to pay income taxes when cashing out 401(k)s. Plus, you could stunt your retirement. “If you need $10,000, don’t make it $15,000 just in case,” Harding says. “You can’t get it back in once it’s out.”
FAQs
If you withdraw money from your 401(k) before you're 59½, the IRS usually assesses a 10% penalty when you file your tax return. That could mean giving the government an additional $1,000 of that $10,000 withdrawal. You will have less money for later, especially if the market is down when you start making withdrawals.
What penalties do I pay if I cash out my 401k? ›
An early withdrawal from a 401(k) plan typically counts as taxable income. You'll also have to pay a 10% penalty on the amount withdrawn if you're under the age of 59½.
How do I avoid 20% tax on my 401k withdrawal? ›
One of the easiest ways to lower the amount of taxes you have to pay on 401(k) withdrawals is to convert to a Roth IRA or Roth 401(k). Withdrawals from Roth accounts are not taxed.
What are the disadvantages of cashing out 401k? ›
401(k) withdrawals
Pros: You're not required to pay back withdrawals and 401(k) assets. Cons: If you take a hardship withdrawal, you won't get the full amount, because (a) only contributions can be withdrawn, not earnings, and (b) withdrawals from 401(k) accounts are generally taxed as ordinary income.
Can I close my 401k and take the money? ›
You can't just cancel your 401k and cash out the money while still employed. You may be able to take a loan against the balance of your 401k, but you are required to pay it back within five years, and there are additional tax implications associated with that option.
How much tax will I pay on 401k withdrawal? ›
When you take a distribution from your 401(k), your retirement plan will send you a Form 1099-R. This tax form shows how much you withdrew overall and the 20% in federal taxes withheld from the distribution. This tax form for 401(k) distribution is sent when you've made a distribution of $10 or more.
Can you cash out your 401k without paying taxes? ›
The Bottom Line
You can't take distributions from your 401(k) without paying taxes. And, if you take distributions before turning 59.5, you'll also pay a 10% penalty. You can temporarily access 401(k) funds by using rollovers and 401(k) loans.
At what age is 401k withdrawal tax free? ›
The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs). There are some exceptions to these rules for 401(k) plans and other qualified plans.
Do I pay taxes on 401k withdrawal after age 65? ›
Yes, you will owe taxes on 401k withdrawals after age 66. This is because even though you have reached retirement age, the funds are still classified as ordinary income and are subject to income tax.
What is the IRS loophole for 401k? ›
There's a trick amongst financial advisors that's rarely discussed, and it can reduce the tax you pay on 401(k) distributions after retirement. It's called variable life insurance.
If you opt to cash out your 401(k), you'll need to contact your 401(k) plan provider and have them send you the money either electronically or via paper check. This process can take anywhere from a few days to a few weeks. In either case, you should have the money within a reasonable amount of time after requesting it.
How do I calculate my 401k withdrawal? ›
The formula for 401k withdrawal is the total withdrawal amount divided by the total account value. This calculation gives you the withdrawal percentage and can be used to determine how much you can withdraw from your 401k.
Can I transfer my 401k to my checking account? ›
Can you transfer your 401k to your bank? Once you have attained 59 ½, you can transfer funds from a 401(k) to your bank account without paying the 10% penalty. However, you must still pay the withdrawn amount's ordinary income (Federal and State).
Can you move 401k to cash without penalty? ›
The IRS dictates you can withdraw funds from your 401(k) account without penalty only after you reach age 59½, become permanently disabled, or are otherwise unable to work.
Will my employer know if I take a 401k withdrawal? ›
The short answer is yes — if you make a 401(k) withdrawal, your employer will know. This is because your employer is responsible for all aspects of offering your 401(k) plan, including hiring the record keeper.
Do I pay state taxes on 401k withdrawal? ›
Retirement distributions from 401(k) plans or IRAs are considered income for tax purposes. Fortunately, there are some states that don't charge taxes on retirement income of any kind: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.
Does 401k count as income against Social Security? ›
Will withdrawals from my individual retirement account affect my Social Security benefits? Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. They do not lower your Social Security retirement benefits.
How long does it take to get 401k withdrawal direct deposit? ›
All distribution requests are sent for approval -- this action is typically completed by your Employer. Once the distribution is reviewed and approved, the payment will be processed. Payments are generally received within 7-10 business days for a check; 5-7 business days for direct deposit (if available).
What happens if you don't report 401k withdrawal on taxes? ›
Because the taxable amount is on the 1099-R, you can't just leave your cashed-out 401(k) proceeds off your tax return. The IRS will know and you will trigger an audit or other IRS scrutiny if you don't include it.
Can I still withdraw from my 401k without penalty in 2023? ›
The main way to avoid a penalty is to wait until you are 59.5-years-old before withdrawing from your 401(k) account. There are a few reasons you can withdraw money from a 401(k) prior to 59.5 without incurring a penalty. These include disability, death, and Equal Payments (IRS code 72t).
To acquire the full amount, you need to maximize your working life and begin collecting your check until age 70. Another way to maximize your check is by asking for a raise every two or three years. Moving companies throughout your career is another way to prove your worth, and generate more money.
Do I have to pay taxes on my 401k after age 60? ›
In general, Roth 401(k) withdrawals are not taxable provided the account was opened at least five years ago and the account owner is age 59½ or older. Employer matching contributions to a Roth 401(k) are subject to income tax. There are strategies to minimize the tax bite of 401(k) distributions.
Do you get taxed twice on 401k withdrawal? ›
You do not need to worry about being taxed twice on this transaction.
Does IRS ask for proof for 401k withdrawal? ›
You do not have to prove hardship to take a withdrawal from your 401(k). That is, you are not required to provide your employer with documentation attesting to your hardship.
Does IRS audit 401k withdrawals? ›
Early Withdrawals From a Retirement Account
You will also owe income tax on the amount withdrawn unless you qualify for an exception. Sometimes - but not always - these types of early withdrawals trigger an audit, typically a correspondence audit where the IRS sends you a letter.
Can IRS intercept 401k withdrawal? ›
Just that, if you don't pay your federal taxes the IRS can seize your 401(k) to cover what's due. In addition to a 401(k) plan, the IRS can also garnish other types of retirement accounts for back taxes, including: Pensions. Traditional and Roth IRAs.
What is the 4 rule for retirement withdrawal calculator? ›
The 4% rule
This approach is simple: You take out 4% of your savings the first year, and each successive year you take out that same dollar amount plus an inflation adjustment. For example, if you've saved $1 million, you'll spend $40,000 in the first year after you retire.
How much do I need in 401k to get $2000 a month? ›
Note. The number of $240,000 multiples will vary depending on your income from Social Security, pensions, or part-time work. You'd need to save at least $480,000 before retirement if you want $2,000 per month.
Is it better to withdraw monthly or annually from 401k? ›
Withdrawing it all at the end of the year can mean more growth in your retirement account over the long run. This is the biggest advantage of making annual withdrawals.
What is the best way to withdraw money from retirement accounts? ›
The Best Way to Withdraw From Your Retirement Accounts
- Start With Your Investment Income. ...
- Don't Automatically Claim Social Security Benefits at 62. ...
- Delay Withdrawing From Your 401(k) and IRA Until RMDs Kick In. ...
- Don't Tap into Your Roth Before Exhausting Other Options.
- How to Withdraw Money from Your Bank Account. Have you finally made the upgrade from a piggy bank and moved your stash of cash into a bank account? ...
- Use an ATM. ...
- Write a Check for Cash. ...
- Fill Out a Withdrawal Slip. ...
- Link Your Account to a Peer-to-Peer Payment Service.
The US Department of Labor requires that the company you work for transfer the contributions to your account as soon as possible. However, it cannot legally take any longer than the 15th of the following month.
What is the 401k law changing in 2023? ›
Effective in 2023, an employer can amend its plan to permit employees to elect that matching contributions or nonelective contributions go to a Roth 401(k) account – so long as the contributions are 100% vested. A retirement plan “lost and found” database will be created.
How can I avoid the 10 penalty on my 401k? ›
If your only option is a 401(k) withdrawal, avoid the 10% penalty by making sure that your withdrawal qualifies with the IRS as a hardship or an exception.
How long does it take to cash out 401k after leaving job? ›
Depending on who administers your 401(k) account, it can take between three and 10 business days to receive a check after cashing out your 401(k). If you need money in a pinch, it may be time to make some quick cash or look into other financial crisis options before taking money out of a retirement account.
How long does it take for employer to approve 401k withdrawal? ›
Generally, when you request a payout, it can take a few days to two weeks to get your funds from your 401(k) plan. However, depending on the employer and the amount of funds in your account, the waiting period can be longer than two weeks.
Do you need proof for 401k withdrawal? ›
You do not have to prove hardship to take a withdrawal from your 401(k). That is, you are not required to provide your employer with documentation attesting to your hardship.
