What are the disadvantages of a 401k cash out?

Answer by  pmm62 (243)

There are several disadvantages. First, in most cases the money is immediately taxable as income. Second, the IRS imposes a 10% penalty on the amount withdrawn. Third, most 401k plans impose a waiting period before contributions to the 401k plan can resume. A better solution may be a loan against the 401k plan if the plan provides for it.

Answer by  JB19 (167)

If you are less than 59-1/2 you will pay a 10% penalty as well as income taxes on the amount of the cash out.

Answer by  sdnco (264)

The disadvantages are you have to pay a high tax amount and then you also have to pay an early withdrawal penalty, typically 10%. Rolling it over is best, but sometimes you may have to withdrawal if it is your only source of cash.

Answer by  Roland27 (16334)

The penalties are often so high that it's not even worth taking the money out. If you cash out on time you don't have to pay penalties or taxes. If you cash out early you have to pay BOTH and often times you are left with an end amount that is half or LESS than what you started with.

Answer by  Cecilia (2828)

The major disadvantage is that all that money will count as income this year. You'll pay taxes on it. If you're under 59 1/2 you'll also pay a 10% penalty.

Answer by  jossf3d (258)

If you withdraw before age 59 1/2 then you will pay a 10% penalty in most cases. In all cases you will have to pay the income tax. If this is your only option, be sure to investigate whether you can qualify for a hardship withdrawal and avoid the penalty.

Answer by  tamarawilhite (17883)

If you cash out a 401K, you must pay income taxes on the entire amount. If you are under retirement age, you must also pay a 10% penalty. For example, if you have $100K and are in the 25% tax bracket, you will have to pay 35% or 35K in taxes and penalties.

Answer by  Dejection (14)

The disadvantage of a 401k cash out are taxes. You will be taxed on the money you pull out as well as probably be hit with a fee by the 401k money manager.