When a consumer cashes out a 401(k) retirement plan before retirement age, there is a 10 percent early withdrawal penalty and the employer is required to withhold 20 percent of the sum for income taxes, according to Motley Fool. Part of the amount withheld for taxes may be refunded later when the consumer files a tax return.Continue Reading
An additional cost to cashing out a 401(k) is the lost opportunity for growth of the funds in the account, says Motley Fool. Money-Zine.com offers a Cash-Out Calculator that takes into account the plan balance, consumer's age, income tax bracket, and projected return on investment. Smart401k.com also offers an Early Withdrawal Impact Calculator.
The 10 percent early withdrawal penalty applies to people under the age of 59 1/2, but there is an exception, according to Nolo.com. People who leave an employer's service during the year they turn age 55 or later can cash out that employer's 401(k) without paying the 10 percent penalty. Another way to avoid the penalty, regardless of age, is to begin taking distributions from the plan in substantially equal periodic payments. These installments must be calculated to endure over your expected life span. In both scenarios, the proceeds are subject to ordinary income tax.Learn more about Investing