Cashing out your 401(k) and using the proceeds to pay off your mortgage lets you borrow at a low rate and invest at a high rate and do so at no risk. Putting your 401(k) money into an IRA or leaving it invested where it is are usually your best options when you leave your job. This includes any money you've contributed and any vested contributions from your employer -- plus any investment profits your account has generated. —Chris Hogan. This is not a good option. If your plan fees are high, you'll be stuck paying them while losing benefits such as an employer match that may have made participating worth the cost. The Internal Revenue Service only allows you to cash out a 401(k) plan in the event that you have turned 59 1/2 years old, suffer a permanent disability or leave your job. You don't have to sell any of your investments (important since the market is really volatile right now). 4 dos and don’ts of an old 401(k) If you have a 401(k) from an old job, you’ve got a few options to work with. One section of the law details COVID-19 401(k) withdrawal guidelines and rollover options to support Americans who have been affected by the virus. With a defined contribution plan such as a 401(k) you typically have several options to consider upon separation. Between taxes and the penalty, your cash-out amount could be much less than the value of your 401(k). The first step to cashing in your 401(k) account is to call the phone number that appears on your 401(k) plan statement and ask them to send you the necessary paperwork to complete to cash in your plan. Not only are you going to get hit with taxes and withdrawal penalties, but you’ll also miss out on the long-term benefit of compound growth." If you're one of the many workers whose job has been affected, you have a lot on your plate right now. This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. If you’re leaving your job and you have a retirement plan (other than a defined benefit (pension) plan), you generally have four options for your account balance: 1. Another option, and the best one for many people, is to do a rollover of your 401(k) funds into an IRA. And it can take some time for your money to move from one account to another, during which you're out of the market. Cumulative Growth of a $10,000 Investment in Stock Advisor, What to Do With Your 401(k) If You Lose Your Job Due to COVID-19 @themotleyfool #stocks, Earnings Preview: Boeing's Dismal 2020 Is Finally Over, Raided Your Retirement Plan During Coronavirus? Your final option is to simply take the money out of your 401(k). Market data powered by FactSet and Web Financial Group. And you could end up owing penalties on the withdrawn funds. You also don't have to pay any fees associated with a rollover of the funds, which some 401(k) plans charge when you move money out. You could potentially be forced to sell shares at a loss to move your money and then miss out on a recovery while waiting to get your money reinvested. Returns as of 01/25/2021. There are upsides to a rollover, though. You can consolidate your 401(k) money with other retirement funds you may already have in an IRA. Another advantage of cashing out a 401k is that an individual can use the money as he or she sees fit. However, you will still be liable for applicable taxes and potential 401(k) early withdrawal penalties on your cash-out. In addition to cashing out, there are three other possibilities: The Foolish bottom line Although you can cash out a 401(k) when you get terminated, cashing out your entire account is rarely, if ever, a smart financial move. Keep in mind that you'll still have to pay income taxes on your cash-out, even if you qualify for one of these exceptions. For example, your new employer might offer a 401(k) plan that you can roll it into. However, you may face a 10% early withdrawal penalty from the IRS for cashing out early, so this might not be the best option. But under the CARES Act, all that changes in 2020. You may want to keep the balance in your old plan, especially if: you like the plan’s investment options, the plan has low fees, or You may even be able to get a combination of both. If you have a 401(k) you've invested in with pre-tax funds, you'll want to move the money to a traditional IRA. Plus, you lose the chance for the withdrawn funds to grow into a sufficient retirement nest egg. Usually, there’s a way to get the money if you really need it, but it can involve some unpleasant consequences. If you have a large 401(k) balance, cashing out could easily catapult you into a higher tax bracket. However, this is probably not the smartest move. Market data powered by FactSet and Web Financial Group. But the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows you to take up to a $100,000 withdrawal without owing this penalty if you face financial hardship due to COVID-19. Former college teacher. Don’t cash out. If I pulled out the 401k, I'd probably just do another MLS deal with 20% down. Your input will help us help the world invest, better! Your plan provider will be required to withhold 20% of the amount you cash out for taxes (although you may owe more), and will also file a form 1099-R to document the distribution. ... 2020. 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