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401k Early Withdrawals – What Are The Consequences

Were you offered early retirement from your employer? Or are you looking for another job? In both cases you must pay attention to your 401k. If you have found a new job then you can simply rollover your existing 401k to a new plan provided by your employer, you keep paying the same fees, rollover the account into an IRA, or choose for the cash. In case of retiring early and if you do not have the money to compensate for the extra years of retirement, then there are basically only 2 options: considering a 401k cash out or finding another job.

Withdrawing your 401k early is not the best choice at all. It may be a good idea at the time but you have to look at the bigger picture too. A 401k cash out is not the same as getting money from a bank account. So, what are the consequences here?

Now we are talking about fees and taxes. A 401k program is meant for retirement. That is why it is important to wait to cash all your savings until the age of 59, at least. There are fees to be paid, even when you retire early. This fee is 10 percent. On top of that come taxes. The contributions as an employee are tax sheltered. On that income you never had to pay taxes. But in case of an early withdrawal, you have to be ready to pay those taxes. The amount will depend on the value of your 401k. Together with the above mentioned 10 percent fee, there may not be much left.

Of course everything depends on the actual situation you are in. If you are young and want to switch jobs then you should better consider the alternatives. You have the choice of an IRA rollover, roll over to the plan of your new employer or pay management fees in order to keep your 401k plan with your former employer. These options are cheaper than paying the penalty for early withdrawal.

And what options do you have in case of early retirement? As stated already, if you had not yet planned to retire for many years to come, take another job or consider a pay cut. Then you still have a job, you can keep paying for your 401k until you really are ready to stop working. If your retirement is near, let us say 2 years, then it is better to spend your savings so that you can cash your 401k plan without the penalties.

Saving for your retirement is a must. If you are looking for more information about self directed ira llc and self directed 401k at