Think Hard Before Cashing Out Your 401k

Mickey | Financial | Tuesday, February 22nd, 2011

So you have left your employer and you are now exploring the possibilities of what to do with your 401k and the idea of cashing out your 401k plan sounds pretty tempting. You can use it to pay off debts or to help get ahead.  This definitely seems appealing but it is very important to realize that cashing out 401k is not a cheap route to take.  See, your 401k plan was designed for longer term use.  You are not taxed when you put the money in but should you decide to take the money early, well the government puts in some hefty penalties to help deter people from this option.  They would prefer that you roll over into a new account so that it keeps growing.

If you are in a situation where you need money then perhaps you can look into other options to get it such as loans from a financial institution.  In a situation like this it is important to exhaust all your other options first.

More often than not most people are not aware of the tax implications by withdrawing your 401k.  If you are not sure what to do then you should definitely seek the advice of a professional to help you make the best choice for your situation.  You definitely want to talk to someone or do your research on how much withdrawing this money will cost you personally. Since each situation is unique, you can check out various 401k calculators that may help give you a better idea of just how much withdrawing this money will cost you.

If you are in the position where you do not know if doing a roll over or cashing out is the right choice then make sure to sleep on it and get some help.  It’s important to remember that you have other options such as rolling into an IRA to withdraw money and only what you need or you can also take a loan against your 401k or even a hardship withdrawal.

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