Are you considering cashing out your 401k due to financial hardship or debt?
In today’s video we’re covering what you need to know before you take money from your 401k or completely cash it out and we’re going to show you how to keep more of your money and how to avoid paying 401k early withdrawal penalties.
Should I Continue Funding My 401k:
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Obviously it’s not ideal to touch your retirement savings, but sometimes your 401k is the only resource you have should you need cash emergencies.
If you have to take cash from your 401k, you want to withdraw the money with the least amount of impact on your finances…and financial future.
The IRS requires automatic withholding of 20% of a 401k early withdrawal for taxes.
Along with the withholding taxes, the IRS will also hit you with a 10% penalty on all funds withdrawn when you file your tax return – if you’re under the age of 59 ½.
59 1/2 is when the IRS says you withdraw money from your 401k and avoid the 10% penalty.
There are a few ways to avoid the 401k withdrawal penalty, such as qualifying for the 55 and separated from service rule, qualifying for a hardship withdrawal, and taking out as little as possible.
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Cashing Out Your 401k? Avoid This 30% Penalty
If you find yourself in a financial bind and are considering cashing out your 401k, think twice before making that decision. While your 401k account may look tempting as a quick source of funds, doing so may result in significant penalties and long-term financial consequences.
First and foremost, it’s important to understand what a 401k is. A 401k is a retirement savings account offered by employers to their employees as a way to save for their retirement. Contributions to a 401k account are made on a pre-tax basis, which means that the money is deducted from your paycheck before taxes are applied, allowing it to grow tax-free until you withdraw it.
One of the major advantages of a 401k is that any earnings within the account are tax-deferred. This means that you won’t pay taxes on the growth within your account until you begin withdrawing those funds during retirement. By cashing out your 401k early, you are essentially missing out on potential tax-free growth over the years.
Before you consider cashing out your 401k, there are a few reasons why it’s typically not a good idea. Firstly, you will face an immediate tax hit. Any money you withdraw from your 401k account will be subject to income tax. Depending on your tax bracket, this could result in a substantial chunk of your funds going straight to the government. If you cash out a significant amount, it may even push you into a higher tax bracket, meaning you’ll owe even more in taxes.
Additionally, if you are under the age of 59½, you will also be hit with an early withdrawal penalty of 10% on top of the income tax. This penalty is designed to discourage individuals from dipping into their retirement savings before reaching the appropriate age. Ultimately, this could mean losing up to 30% of your 401k funds right off the bat.
Furthermore, by cashing out your 401k, you are significantly hurting your future retirement savings. The power of compound interest and investment growth over time cannot be underestimated. By allowing your 401k to remain invested, you have the potential for exponential growth, which can greatly benefit you during retirement. When you cash out, you not only lose the principal amount but also the opportunity for that money to grow and multiply.
Instead of cashing out your 401k, consider alternative options to tackle your financial challenges. One option is taking out a loan from your 401k account. Most 401k plans offer this feature, allowing you to borrow up to 50% of your account balance, up to a maximum of $50,000. While you will still need to pay back the loan with interest, the interest paid goes back into your account, minimizing potential losses in the long run.
Another option to explore is a hardship withdrawal. Some 401k plans allow participants to take a hardship withdrawal in cases of financial emergencies. However, it’s crucial to note that these withdrawals are subject to income tax and the early withdrawal penalty.
In conclusion, cashing out your 401k should be a last resort. The penalties and taxes associated with early withdrawal can quickly eat away at your hard-earned savings. By exploring alternative options and seeking financial advice, you can find ways to address your immediate financial needs without compromising your long-term retirement goals.
We hope you got a lot out of this video. Please note, there may be comments and questions we cannot answer because we cannot and will not offer specific investment advice.
MAKE SURE TO WATCH:
⭐Should I Continue Funding My 401k: https://youtu.be/5BuFHyMEdqE
⭐Diversify Your 401k: Maximize Your Portfolio and Protect Your Savings https://youtu.be/gMGre1cy7FU
⭐401k Loans: Beware of Double Taxation [Investors BEWARE] https://youtu.be/SWf5PDTxa-I
⭐PROTECT Your 401(k) in a Volatile Market https://youtu.be/6lgo_DwwMcg
401ks are such a bankers scam! "Dont touch it!! Demons will come eat your face off!" Screw wall street. Buy land.
I plan on retiring from my job at 68 years old.
My question is, would it be better to take a lump sum payment from my 401k and pay off the 20% tax in one shot instead of paying taxes for several years on the distributions?
If it’s from an old employer roll it over to IRA and take out tax free ?? Do I have that right
I'm 54 and my wife and I are VERY worried about our future, gas and food prices rising daily. We have had our savings dwindle with the cost of living into the stratosphere, and we are finding it impossible to replace them. We can get by, but can't seem to get ahead. My condolences to anyone retiring in this crisis, 30 years nonstop just for a crooked system to take all you worked for.
If you get let go from your job , do you still have to pay the penalty?
So many of these post try to talk people out of the thing they've come here to learn to do.
Suggestion: Start with the premise that a person is going to cash out their 401k, not that they want you to convince them not to.
My ex employer said because I was terminated after 3/31/23 plan year end, they can not process my contribution until march 2024…. he said they haven't done their evaluations…. I need that money now. And rolled over my 401k from my previous employer before this one. Can they do that?
I’d be curious if I am over 55 and my company is bought out so now new company owns the old company does that work in my favor if I wanna cash out my 401(k) is that like me leaving my job
My growth of 401k is 2.74% in the past 6 months. In this environment does investing under a brokerage with a custodian outperform a 401k? should I seek a pro to grow my funds on brokerage acct or still hold? I have 5 years to retirement. Happy to discuss.
It's recommended to save at least 15% of your income in a 401k. You can use online calculators to estimate how much you should save based on your age and income. Saving at least 15% of your income in a 401(k) can help ensure that you have enough money to retire comfortably. By saving this much, you can take advantage of compound interest and potentially grow your retirement savings over time.
Im 28 and have about 20k in my 401k from my previous employer. Currently I’m unemployed but need access to funds to pay a high interest loan. Would SEPP be the best viable option?
do you only pay tax on capital gain?
A whole bunch of talk to say nothing
Thank you for these helpful information.
Welcome to getting screwed in the USA. Bottom line no more 401 k
Im sorry but hardship withdrawals are rarely an exception to the 10% penalty from the IRS on 401k plans.
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few understand
How many people voluntarily report withdrawals to IRS is the real question.
Honestly I think this whole 401k is just stupid specially when you need it for the times we're in now
Good video. I owe back taxes . Yay
I use my 401k to buy real estate. I get much better return on my investment property then just sitting there. 401k is set up to keep you bonded. That’s why they penalize you for making a smarter move
My 401k never made money, ever since I started putting money in it, and I had a moderate conservative portfolio. Now I need the money, it lost 30% since I quit contributing with my employer when I switched jobs 3 years ago, now they’re gonna take another 30%. You can’t eat stocks folks…
Question: If I work overseas tax-free and have a 401k, how can my employer take 20% in taxes ?
401K designed to rob people
I have a 401k, not much in there…maybe $6700 and I am 46. Anyways, I haven't contributed to it for several months and I just wanna close it out and get the money. I realize there are taxes and penalties involved for doing so. Is doing what I want even possible for me to do? I am still employed with the company. I already have enough money deducted from my pay for health insurance. No hardships or anything like that. Since I am not contributing, the balance slightly goes down from account maintenance fees periodically. Honestly I just don't want to participate in it and since I am not contributing, I can't see why I would need to keep the account.