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Can I Cash Out My Old 401(k) And Take The Money?

Can you cash our your 401(k) and take the money? Technically, yes. But you probably shouldn’t. Cashing out early will cost you huge in penalties and lost growth over the next few decades.


Can I Cash Out My Old 401(k) And Take The Cash-It’s a basic but all-too common question posed on financial blogs like this one: “I just left my job. I have like $1,000 sitting in my old 401(k) and I’m short on cash. Can I just cash out the 401(k)?”

About cashing out old 401(k)s

Technically, yes: After you’ve left your employer, you can ask your plan administrator for a cash withdrawal from your old 401(k). They’ll close your account and mail you a check.

But you should rarely — if ever — do this until you’re at least 59 ½ years old!

Let me say this again: As tempting as it may be to cash out an old 401(k), it’s a poor financial decision. That’s because, in the eyes of the IRS, cashing out your 401(k) before you are 59 ½ is considered an early withdrawal and is subject to a 10 percent penalty on top of regular income taxes.

In most cases, your plan administrator will mail you a check for 70 percent of your 401(k) balance. That’s your balance minus: 10 percent for the withdrawal penalty and 20 percent to cover federal income taxes  (depending on your tax bracket, you may owe more or less when you file your return).

Its financially prudent to save for retirement and leave that money invested. But paying the 10 percent early withdrawal penalty is just dumb money — it’s equivalent to taking money you’ve earned and tossing it out the window.

What about my current 401(k)? Can I access that money anytime?

You cannot take a cash 401(k) withdrawal while you are currently working for the employer that sponsors the 401(k) unless you have a major hardship. You can cash out your 401(k) before age 59 ½ without paying the 10 percent penalty if:

  1. You become completely and permanently disabled
  2. You incur medical expenses that exceed 7.5 percent of your gross income
  3. A court of law orders you to give the funds to your divorced spouse, a child, or a dependent
  4. You retire early in the same year you turn 55 or later
  5. You are permanently laid off, terminated, quit, or retired 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(k) and pay the 10 percent penalty if you need funds for certain financial hardships and have no other source of funds. These hardships include:

  1. The purchase of your primary home
  2. Higher education tuition, room and board, and fees for the next twelve months for you, your spouse, your dependents or children
  3. To prevent eviction from your home or foreclosure on your primary residence
  4. Tax-deductible medical expenses that are not reimbursed for you, your spouse or your dependents
  5. Other severe financial hardship

Even if you meet these requirements, cashing out your 401(k) should always be seen as an absolute last resort.

Read more:

If you start early and let the money grow, over time your 401(k) could hit $1 million! Cashing out now means giving up much more money in the future:

Editor’s note: This article was originally published in January 2013. It has been thoroughly updated for relevance and accuracy.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. HI :) I had to quit my job and I have to cash out my 401. I have a short term 401 set up and I have A loan currently that I had borrowed from it last year… however I won’t be able to pay the loan back now and I’ll need to cash out my account. will I be able to cash it out and how long until I get my check? just a rough guess is appreciated. thx in advance!

  2. Are not working now i need pay to much bills

  3. Important to note that hardship distributions are only available if the plan document specifically allows it, and many don’t. Even if the plan does allow for hardship distributions, the distribution is still subject to federal/state taxes as well as the early withdrawal penalty. In addition, you can’t contribute to your 401k for 6 months after receiving a hardship.

    Bottom line – save up an emergency fund first. The costs of withdrawing from your 401k are enormous.

  4. With respect David, I disagree completely. Using real estate, I have been able to generate 15% returns on my apartment building and SFRs. I used a 401(k) loan for the money to get my down payments. Best decision ever! If you factor in the 4.5% interest I am paying on my loan (which goes back to my 401(k) account), I am still slightly over 11% returns! My 401(k) is untouchable for the next 24 years…who cares if it earns an average of 8%? I still can’t touch the money and I would end up a slave to my job. I say to cash out and put the rest into properties and businesses.

    My mentor is worth over $8 million. Guess how much he has in a 401(k)- $0. Guess how much his properties/assets give him in passive income each month? Between 30-40K after expenses. Sorry, but wealthy people don’t rely on 401(k)s.

    Does everyone seriously want to work until 59 1/2 to get access to a 401(k) that will be taxed? Do you know what kind of tax write offs I get every year on my properties? I get to write off mortgage interest (even though my tenants are actually paying it), repairs, depreciation, insurance, property taxes, utilities, property management, etc. The IRS loves real estate investors! I won’t get jack squat for write offs if I wait will I am almost dead to collect from a 401(k).

    If you want to be wealthy you have to do what wealthy people do with their money. Buy assets that throw off cash flow. Stop thinking that your 401(k) is going to make you incredibly wealthy. If it does give you any sort of decent return, it will only be because you slaved away at a job for 30+ years, and then you will be TOO OLD to enjoy life. Anyone up for traveling the world with a knee replacement and bad vision? Sipping prune juice by the beach?

    No thanks! Taking my money out has given me steady income that is hardly taxed (thank you IRS) and increases my net worth every time my tenants pay down the mortgage. I am not even throwing appreciation into the equation here because I don’t rely on it.

    Bottom Line: If you want to live a middle class lifestyle and retire at 60+ years old then go the 401(k) route. If you want to live life how you CHOOSE, then start imitating the wealthy and buying cash flowing assets.

    Thanks for letting me get my points out, David! Best wishes on the success of your site!

  5. I think that it’s not okay for a company to hold onto you money after you leave that company. My husband left his job and then tried to get his 401k from Chase they are still giving him the runaround saying that the company had not said that he didn’t work their anymore. He called the company and they said they had sent that information to the 401k plan but they are just not telling him. They said that they can release it when they get the information from the company. We are about to loose our home and he has already lost his job. We had called and asked for a hardship loan they said that we could not fill out the papers on line and said they had to mail them. By the seven days it took to get the papers he had already lost his job. Now it’s just a runaround. This is his money and the plans are just keeping it like it is there’s there has to be a better way and you have no option but to wait for them and hope that you can survive until then. I will never put my money in a 401K again. I am very frustated. The reason he needed to take the money out is that I had just had a baby and found out that my company did not pay for maternity leave and then they also did not offer short term disability. I had stayed in the hospital for a total of a a month prior and then can not return to work for eight weeks. So this is so frustrating knowing that you have a life line and not being able to get to it because of this. I am just writing to see if anyone has any advice about how to get them to release my money before we lose everything.

  6. jhosetta says:

    And then a week before they send you a check. That’s what was told to my son. His company has 30 days to approve it or deny it. 30 days. I think that’s too long to get what’s mine.

  7. jhosetta says:

    Its not that easy. If your plan has a provision it takes 30 days and them a well b4 they mail the check. That’s what they are doing top him now.

  8. Definitely not something that should be done unless its a last resort as accounts that grow tax free are better than ones that don’t. Then again if you’re in your 20’s and suddenly lose your job you might be in that desperate situation.

    Here’s a piece of advice for people who do cash it out. See if you can roll the account into a roth then withdraw the funds from the roth without the 10% penalty. If you were rich this might be something you would use to attemp to circumvent the max contributons or income limits of the roth. If you’re poor its a way to only have to pay federal and state tax on your withdrawal.

  9. If anyone knows anything about Money, Banking & Credit, Fiat paper money backed by nothing, Private Central Bankers, and politicians, you would be wise to get your money out of this government prison, before they steal it or devalue it to nothing.

  10. I was in the military in 2000 and I had paid on my 401k the whole time i was active… I want to be able to cash it in but I dont know where to begin to get things started… Can anyone help me? And also, how much interest does it collect over the years?

  11. PRISCILLA RODRIGUEZ says:

    I RECENTLY FOUND OUT I HAVE BREAST CANCER & NEED TO HAVE EMERGENCY SURGERY SO I TRIED TO GET A HARDSHIP LOAN FROM MY 401K & IT WOULD NOT LET ME EVEN AFTER I PROVIDED ALL NECESSARY DOCUMENTATION! I GOT THE THE RUN AROUND! FINALLY MY PARENTS FOOTED THE HOSPITAL BILLS! HOW CAN A PERSON’S LIFE BE LESS IMPORTANT THAN A COMPANY MAKING MONEY! THE COMPANY I WORK FOR THEN FIRED ME FOR BEING SICK IN THE HOSPITAL FOR TOO MANY DAYS! SO I TOOK THEM TO COURT & I WON & THEY WERE ORDERED TO PAY ME IN THE MILLIONS PLUS HOSPITAL BILLS PLUS MY 401K! SO THEY ENDED UP LOOSING MORE MONEY THAN THEY REALLY HAD TO IF THEY WOULD! THEY SHOULD JUST HAVE GIVEN ME MY 401K INSTEAD OF BEING SO GREEDY & THEY WOULD HAVE SAVED!

  12. iam 27 yrs old have a second baby and quit my job cause i couldent afford daycare. i was wondering if its a good idea to cash out my 401k its not much its only 1300.00 is it worth it any ideas? im confused dont know much about 401k

    • While you did seperate from the employer and can take out the 1300.00, you will be subject to 20% federal income taxes and the 10% penalty if you cash out before age 59 ½. This would leave you with roughly 910.00. If it were me and I had no job and a child to take care of I would take the 910.00, seeing how it is not that much. However, if it were a more substantial amount such as lets say 40k, then after taxes it would be 28000, having to pay back 12k in taxes. That would be something worth considering.

  13. i was recently terminated and have no way to pay my mortage,and i and i need to cash in my 401k now, but keep getting the runaround.

  14. Peter Schildhause says:

    Assume a buck in the 401k will double in 5 years? Do I take it out now or wait. I take it now and pay 30%fed tax on ordinary income and 10% state so I hav 60 cents that doubles to $1.20 On that I pay 15% long term gains abd 10% state so I’m left with 90 cents. Assumption two-let it ride in the 401k. It doubles from a buck to 2 bucks-I take it out and pay 30% fed and 10% state and end up with $1.20- loooks like leaving it in is the right way to go. Well?

  15. Peter Schildhause says:

    I am 59 1/2 and surely I can take the money= how much at a time? could i take it all (rather devalued now) and invest it personally and then pay long term capital gains on all future gains. It it stays in the 401k and recovers, the the gains will be taxed as ordinary income as i take it out. I haven’t done the arrithmetic, but it seems that ignoring problems like minimum tax calculations. taking it out an paying tax now will be about equal to letting it ride=unless I throw i state tax which doesn’t recognize long term gains. Tough Question

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