Q:

What are the rules for cashing out a 401K early?

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Quick Answer

401(k) plan holders are subject to a standard 10 percent penalty on the amount they withdraw unless certain conditions are met, including reaching the accepted withdrawal age of 59 and a half, notes Fidelity.com. Withdrawing from the account before the account holder reaches this age is considered early cash out, but there are some rules and conditions that make it possible to withdraw from the account without incurring penalties, including demonstrated financial hardship. If these rules and conditions are not satisfied, however, the account holder must typically pay taxes on top of the 10 percent penalty, meaning those in high tax brackets could end up losing about half of the value of their account by withdrawing early.

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Full Answer

The conditions that satisfy penalty-free early withdrawal from a 401(k) account are typically conditions of genuine hardship, such as permanent disability or having unreimbursed medical bills that are higher than 10 percent of the account holder's adjusted gross income, as reported by Bankrate.com. If the account holder dies before age 59 and a half, her beneficiaries may draw from the account without being penalized.

In some cases, such as early retirement, the early withdrawal penalty is waived without any demonstrated hardship. There are specific early retirement conditions that must be met; for example, for most people, this means retirement at age 55 rather than 60, although certain public servants, such as emergency services workers, may be able to avoid the penalty if they retire at age 50.

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