As we all know 401k is a plan dedicated especially to make your retired life financially secured, but if you want to cash out 401k before your retirement, you should know about what are the Penalties for closing a 401k Plan? This means, just like with any saving plan if you are in a dire need of money you can rely on it. Yes, you can cash out your 401k retirement plan too. But, it is not recommended as it is not profitable. This can only be done at the risk of losses associated with it like the early withdrawal penalty. Yet if you need to withdraw the funds from your 401K account, continue reading below to know how to make the most out of it.
What are the Taxes and Penalties for early 401k Withdrawal?
Tax Brackets: While 401k plan is itself one of the best ways of tax deferred savings yet if you decide to cash out your 401k retirement plan, you may have to pay up to 20% taxes on it. The IRS withholds this percentage as a penalty for a early withdrawal.
Employers Match: One of the main reasons why the majority of people prefer a 401k plan over any other retirement plan is because it constitutes of the employers match. However, if you decide to cash out your 401k plan before retirement or if you have separated from your employers while cashing it out, this employer’s contribution will be fortified. Since it is a freebie no one would want to leave, this makes it an option to be used in emergencies that you cannot survive without using these.
Early Withdrawal Penalty: If you are withdrawing your 401k plan before retirement, the IRS can impose an early withdrawal penalty. This could be anything up to 10% making it another point you want to consider before cashing it out.
Vesting Schedule: Different employers may have varying vesting schedules. These decide how much ownership you and your employer hold of the 401k plan. It plays a decisive role in how much contribution will be fortified after the withdrawal. If you are 30% vested and your employer if 70% vested, you might have to lose up to 70% of the contributions.
Therefore we can say that it’s never a good idea to close 401k as it may lead to lose your precious money and you have to pay penalties and taxes as mentioned above. If you are saving from your retirement, let the money to be used in your retirement and enjoy your life post retiring with hell lot of money without being dependent on your children. If you still need money and need to close out on 401k, you can read out here about How Can I Cash Out My 401k without Penalties?