Has Anyone Cashed Out Their 401(k)?

[go_deep]

If you have a roth 401k or roth IRA you can withdraw any contributions made into the fund without penalty since those funds are post tax dollars.

Strongly recommend you don't do that unless your at retirement age, or buying something with it that will make income.

 

[Bachto]

Would you borrow money at 30% - 40% interest? when you cash out your 401k you lose 30% - 40% to taxes and fees.

There is almost no scenario where cashing out your 401K makes any sense

 

[ckt3]

I took out a giant heloc to go on some sheep hunts and I needed the funds so I cashed out my 401k

I’d recognize this legend’s avatar picture anywhere

 

[Maverick1]

Cashing out a 401(k): Would love to hear how old you were when you did it, how you rationalized doing it, how old you are now and if you are still glad you did or not?

Cashing out a 401(k) partially or entirely vs taking a loan out against a 401(k)? Pretty big difference.

A loan allows you to borrow your own money without triggering income taxes or early withdrawal penalties.

Cashing out permanently drains your retirement, immediately subjects the entire amount to income taxes, and usually triggers a hefty 10% early withdrawal penalty if you are under age 59½


Taking a Loan Against Your 401(k)

How it works:
You borrow up to 50% of your vested balance or $50,000—whichever is less. You pay the money back (with interest) to your own retirement account over a set period, usually up to 5 years.

Taxes & Penalties:
None, provided the loan is paid back on time. The interest rate is typically reasonable, and all interest payments go back into your own balance.

Credit Impact:
Zero. It is not treated as traditional debt on your credit report, so it won’t hurt your score.

The Catch (Job Loss):
If you quit or are laid off, the entire outstanding loan balance usually becomes due in a very short window (often 60 to 90 days). If you can’t pay it, the remaining balance defaults, meaning it converts into an early withdrawal—triggering taxes and the 10% penalty.



Cashing Out Your 401(k)
How it works:
You request a full or partial distribution of your retirement funds. You take the cash and it permanently leaves your retirement account.

Taxes & Penalties:
You will pay ordinary federal and state income taxes on the withdrawn amount. If you are under 59½, you will also owe a 10% early withdrawal penalty to the IRS.

The Long-Term Cost:
You permanently miss out on compound growth. Taking a large sum out can also bump you into a higher tax bracket for the year.

The Availability:
Under IRS rules, cashing out completely while you are still employed and under age 59½ is usually not allowed unless you qualify for specific "hardship" conditions (e.g., preventing eviction or paying for unreimbursed medical bills).

 

[S.Clancy]

Cashing out a 401(k) partially or entirely vs taking a loan out against a 401(k)? Pretty big difference.

A loan allows you to borrow your own money without triggering income taxes or early withdrawal penalties.

Cashing out permanently drains your retirement, immediately subjects the entire amount to income taxes, and usually triggers a hefty 10% early withdrawal penalty if you are under age 59½


Taking a Loan Against Your 401(k)

How it works:
You borrow up to 50% of your vested balance or $50,000—whichever is less. You pay the money back (with interest) to your own retirement account over a set period, usually up to 5 years.

Taxes & Penalties:
None, provided the loan is paid back on time. The interest rate is typically reasonable, and all interest payments go back into your own balance.

Credit Impact:
Zero. It is not treated as traditional debt on your credit report, so it won’t hurt your score.

The Catch (Job Loss):
If you quit or are laid off, the entire outstanding loan balance usually becomes due in a very short window (often 60 to 90 days). If you can’t pay it, the remaining balance defaults, meaning it converts into an early withdrawal—triggering taxes and the 10% penalty.



Cashing Out Your 401(k)
How it works:
You request a full or partial distribution of your retirement funds. You take the cash and it permanently leaves your retirement account.

Taxes & Penalties:
You will pay ordinary federal and state income taxes on the withdrawn amount. If you are under 59½, you will also owe a 10% early withdrawal penalty to the IRS.

The Long-Term Cost:
You permanently miss out on compound growth. Taking a large sum out can also bump you into a higher tax bracket for the year.

The Availability:
Under IRS rules, cashing out completely while you are still employed and under age 59½ is usually not allowed unless you qualify for specific "hardship" conditions (e.g., preventing eviction or paying for unreimbursed medical bills).

I'm assuming is case #1 you can't make gains off the leveraged amount until the loan is paid off in full?

 

[TheGrayRider]

Dumped my entire $25,000 IRA at 33 yoa and paid cash for my 1st year of private law school. No 10% penalty because the money was used for education.

Licensed and practicing now for almost 25 years. Self-employed and happy. Never looked back.

Good luck and happy hunting to all, TheGrayRider a/k/a Tom.

 

[sbaker0029]

I made a withdrawal on my Roth IRA penalty free to pay off my wife's car and when we decide she was going to quit teaching after our first born and be a stay at home mom.

Zero regrets on that decision. However, I would not have cashed on my 401k or traditional IRA and taken the penalty to do the same thing.

 

[Andrew12gauge]

I cashed out a 401k that I had with a former employer, the financial institution that it was with while with the employer was already not great, the one that it got sent to once I left the job was probably the worst I’ve seen, the year is 2024, this institution had a website straight from the 1990’s and no app, all of my money was sitting in a savings account essentially earning nothing and their website was so dysfunctional I couldn’t make a purchase of stocks, etfs or mutual funds. I got frustrated and pulled it all out figuring long term it was worth whatever penalty I had to pay to get the money back into the market. We also just happened to adopt our son in 2024, unbeknownst to me until tax time, adoption is an event that gets you an exemption on the early withdrawal penalties for a 401k. That one worked out in my favor


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[Nick Muche]

Any advice on what to do with an inherited 401(K)? I know I have to do something with it within 10 years but I’m a little stumped on how to maximize it while reducing tax burden.

 

[Clarktar]

Plan to borrow from money to buy a commercial fishing permit.

I'm also bearish and don't mind taking some money out and having it in another "basket" for a couple years until it's paid back.

 

[One300wsm]

I’m waiting till I’m 67 no penalties and lower taxes, I’m going to use it to go on a Stone Sheep hunt.
I believe I’ll pay the penalty and taxes and go on that Stone Sheep hunt why I’m healthy .
Screw tomorrow live for today, When I’m broke I’ll move to LA turn liberal and live on the beach and the government will take care of me. Now that’s a retirement plan.

 

[mt terry d]

I did 34 years ago
No regrets.

 

[Jason Snyder]

Any advice on what to do with an inherited 401(K)? I know I have to do something with it within 10 years but I’m a little stumped on how to maximize it while reducing tax burden.

I’d talk to your financial advisor. Life insurance (variable) and Roth IRA conversions are what I’d be looking at?

 

[MallardSX2]

Again, after reading these posts it’s obvious why nobody can retire at a decent age. Lol

 

[PredatorX]

I'm assuming is case #1 you can't make gains off the leveraged amount until the loan is paid off in full?

As you pay off the loan, the payment goes back to your 401k account so each month you would make gains but only on the payment. It doesn’t have to be paid off in full to get that money working again.


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[missjordan]

I would try my hardest not too. Because you’re denying yourself the growth factor on your investment. Plus the big penalties and interest for early withdrawal.

The hardest part is your first $100,000. After that compound interest starts working in your favor. Especially in the later years


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[pods8 (Rugged Stitching)]

Any advice on what to do with an inherited 401(K)? I know I have to do something with it within 10 years but I’m a little stumped on how to maximize it while reducing tax burden.

Assuming its a decent chunk of change that would trigger a really high tax bracket if drawn at once you should be pulling it out to maximize tax brackets.

Stupid simple example, say its $1M and you are single and in the 22% bracket on ordinary income (means your taxable income is under $105k), pulling out the $1M at once would take you up into the 37% bracket (all of it isn't taxed at 37% but you fill in each bracket with the extra income, 22%, then 24%, then 32%, etc.).

Instead if you pulled out money each year to maximize the income allowed in the 24% bracket you you could pull out $100k+ each year to work it down getting hit at 22% & 24%. The ongoing gains might still creep up into higher brackets that 10th year but its going to reduce the taxes.

You can pull out more each year if married to work the tax brackets, I just kept it simpler above.

 

[pods8 (Rugged Stitching)]

Roth IRA conversions are what I’d be looking at?

(assuming its not from a spouse) You can't convert an inherited IRA, you can indirectly do an inherited 401k. But it triggers taxes and has to go to a inherited roth IRA which still needs to be depleted in 10yrs. So your option is take a big tax hit to convert it to a inherited Roth IRA but then it has tax free growth till the 10yr mark (that may or maynot offset that taxation). Or you just take it out as income over the 10yrs and invest it.

Regardless you can't directly get it into your own Roth IRA as far as I'm aware.

 

[homers]

There’s going to be a lot of poor future 65 year olds on this forum

 

[One300wsm]

Any advice on what to do with an inherited 401(K)? I know I have to do something with it within 10 years but I’m a little stumped on how to maximize it while reducing tax burden.

There will always be a tax burden, and tax rates aren’t going down there going up. Cash it in pay the taxes and do something you want to do, why you’re young and healthy. These people waiting to retirement to do something end up doing nothing, most aren’t healthy enough or end up dying and leaving it to someone else as in your case. No disrespect and sorry for your loss. Don’t be that person, I’m sure they would want you to do something with it since they didn’t get the chance.