When changing jobs, cashing out your 401(k) is one of the options available to you. For most people, this is the least preferred option. Taxes and penalties generally offset any advantages a cash distribution may offer. However, in some circumstances, closing your 401(k) at your previous employer and withdrawing the cash may be the best alternative. Continue reading to learn what factors to consider before cashing out your 401(k) and how Wickham Financial & Insurance Services can help guide you through the decision-making process.
Be Sure You Qualify
Cashing out your 401(k) is only an option once you leave the company that manages your 401(k) plan. If you’re thinking about a job change, keep in mind that you cannot withdraw your 401(k) funds until after you are officially no longer employed. Closing your account and receiving the final distribution check may take several months to process. This is important to consider if you are counting on the 401(k) funds to carry you through until you start your new job. You may not get the money as quickly as you need it. However, early withdrawals are allowed if you meet certain hardship eligibility requirements.
Prepare to Pay Income Tax and Penalty Tax
Withdrawing funds from your 401(k) before the age of 59½ comes at a hefty cost. The money you withdraw will be subject to your regular income tax rate plus an additional 10% penalty tax. However, under certain conditions you may be able to avoid taxes and penalties. If you do not qualify for any of the exceptions, you will likely pay a significant amount.
Consider Long-Term Consequences
The advantage of tax-deferred contributions to your retirement account is that the funds can grow on a tax-free basis over time. The longer you hold funds in a tax-advantaged retirement account, the more money you earn in the long run. Withdrawing funds early to meet short-term financial needs has a significant impact on the potential growth of your savings. Once you take money out of the account you considerably set back your retirement savings. Taking a cash distribution should be the last alternative and only utilized if no other options are available to you.
How Wickham Financial & Insurance Services Can Help
Before committing to cashing out your 401(k) you need to evaluate your complete financial situation. That means assessing your current financial condition and connecting where you are today with your long-term financial goals. Our team at Wickham Financial & Insurance Services has experience across the insurance and financial spectrum and can help you create a clear profile of all your short-term, mid-term and long-term financial needs. We work with you to consider all of your alternatives before committing to a move as drastic as taking a cash distribution on your 401(k).
At Wickham Financial & Insurance Services, we believe building a relationship is an essential component for successful insurance advising and financial counseling. We understand generalizations based on standardized formulas do not take into consideration the individual. Our holistic approach to client service means we focus on you and your specific circumstances and goals as we offer you guidance. We strive to make a personal connection with each one of our clients and take pride in the fact that our clients have one number to call to meet all of their financial and insurance needs.
Any information provided has been prepared from sources believed to be reliable but is not guaranteed, does not represent all available data necessary for making investment decisions and is for informational purposes only.