What You Should Know About 401K Withdrawal Penalties

There are a lot of things to take into consideration in this situation, but one of the most important things often gets overlooked with all of the other things you should know about 401k withdrawal penalties.

So, if you're made the decision to go forward you hopefully already understand that you will be charged a ten percent early withdrawal penalty, as well as state and federal taxes on the amount you withdraw. You're also going to be missing out on the money you could have earned on your investments between now retirement age (fifty nine and a half years old) that you needed for your retirement, causing you some problems in the future.

These are things that get talked about a fair amount when people bring up cashing out.

You hopefully also understand that if you decide to move forward despite all of that, you can't actually cash out anytime. You can only do this when you're at a transition point, meaning that you have just left the employer where your 401k is held. Immediately after leaving a job you have four choices about what to do with your retirement account--you can cash out, you can leave it where it is, you can transfer it to your new employer, or roll it into an IRA. If you have not just left a job you cannot actually move forward with the withdrawal.

The other thing you should know about 401k withdrawal penalties is how you need to pay them. Your employer will automatically hold twenty percent of what you cash out to pay for the penalties, but this will likely NOT cover everything. You will be accountable for the rest at the time you file your taxes for the year. This is something you need to be aware of ahead of time so you can put some money aside to pay for this when taxes come due, if you are unaware you could end up in a tight financial situation come tax time.