How to Get Cash From Your 401K

How to Get Cash From Your 401K

Anyone who has a 401k can cash it out at any time. Just know that you face a 10% penalty if you are cashing it out for a non-qualified reason. You face this penalty along with the taxes you will owe on the amount of your 401K. For most taxpayers this combination totals a loss of about 30 to 40% of the account’s value.

There are ways to access 401K funds without paying the full penalty of cashing out. One way is to obtain a loan from your 401K. There is no 10% penalty associated with the loan, although there is a preset interest rate you must pay. Also, the money you do pay back against the loan is taxed.

The 401K administrator must approve a loan against a 401K. Loans are usually granted for secondary education expenses, the purchase of a home, or to pay medical expenses. The loan must be paid off in full in five years and the payments must be made at least quarterly.

One of the drawbacks of a 401K loan is that the money is no longer accruing interest. As the money is paid back in, the interest will begin to gather, but not until payments are received. Interest will only accrue on the payment portion.

For some people, the 30 to 40% loss is worth the cash out, but for most it is not. Think things through before you take the money and run. After all, this money represents savings for your retirement years, to supplement pensions and Social Security. You might think you need it now, but it is certain that you will need it then.

Before taking any action with your 401K it is a good recommendation to consult with your financial planner or your attorney. You need to calculate how the actions you take now might affect you later in life.

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