Mr. SSC would have the equivalent of $42,000 at the time he turned 60… or about 10 months of living expenses. You’ll get more money once you get out of school and get a nice job.” And who am I to argue with someone that’s agreeing with me? This site uses Akismet to reduce spam. You still have to enter the whole amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket)  and then the withholding is subtracted from the total tax to figure your refund or tax due. i received about $4000 back but the balance befoer taxes was between $8000-$10000. I did not get a letter or anything asking what to do with my 401K so I assumed it would stay with ING... which is what I wanted it to do. You can join my 3 friends and sign up to get new posts delivered straight to your inbox. Looks like Mr. SSC gave up almost a year of freedom for that ‘cool’ SUV. I quit my job with a 401K about 90 days ago. His other option with the $ was grad school that would’ve increased his earning potential. We are not professional financial anythings and we do not have formal financial planning training. Glad you roll yours over. The biggest disadvantage is the penalty the IRS applies on early withdrawals. What I didn’t understand or calculate at the time, was the lost growth potential that my 401k could have been earning for me during those 2 years. I was a pretty smart guy. That was what he had saved in his 401k over the course of 10 years working at a blue collar job. Yep, one of the biggest money mistakes you can make and I did it, against countless advice to NOT do it. You betcha! Let me know! Your email address will not be published. Cashing out a 401k has a whole different meaning, where you’d owe penalties for taking distributions today from your 401k, and pay tax today. It is tempting to cash out your 401(k) when you need capital – it’s even more tempting if you’ve been cut back or are battling against debt. While I tried to avoid spending it like your brother-in-law, or even my dad would have, it still ultimately got frittered away. Surely something great and fun, and memorable because I gave up so much potential growth on that 401k, right? Yes you have to report it and it is income. His other option with the $ was grad school that would’ve increased his earning potential. So, I informed my company that I was going to cash it out and got some pushback. Now he’s about to hit age 40 and just restarted a 401k and has almost nothing saved for retirement. BUT, here’s the kicker! The year is 2005: I had been out of college for about 3 years, had a nice steady job, and had finally gotten accepted into grad school. . Besides,I go to the mountains and snowboard and hike and fish and do outdoors stuff, of course I need an SUV.” So, I started car shopping, used of course, and something I could cover with cash, or at least just a minimum loan. My ex took his cashed out 401k & a re-fi of his primary residence & used it towards another investment property, purchased right before the real estate bubble. Not hte best choice, but the only choice I had at the time. The SUV was about the only fun thing I did with the 401k money. Required fields are marked *. I had been going to school part-time, but since that wasn’t working out well, I bit the bullet and quit my job and signed onto school full-time. As for choosing to prioritize my home purchase over my 401k, yeah, I did that too and don’t regret it. Well, that’s not entirely true… My car’s transmission went out and instead of forking over $2k to fix it, I thought “you know what, I’m not a car guy, I need an SUV. My husband cashed out his retirement and, after 36 years, filed for divorce ... Don’t miss:I paid off my wife’s student loans — then she filed for divorce after two years of marriage. Live and learn. I cashed out my 401k upon termination of employment, do I have to file this is on my taxes? So I cashed it out. I did not want to cash it out or move it to another account. These are our opinions and results of what has worked for us so far on our journey. I’ve definitely missed out on earnings and future growth. After you leave your job, there are several options for your 401(k). Let’s go back to how this all got started. If you’re thinking about withdrawing from your IRA then this is the article for you, as we discuss the pros and cons of cashing out of your 401(k). When you file your income tax return, you must include any cashed-out amounts from your 401(k) plan as regular income, along with your other sources of income. Your email address will not be published. Realistically, I wouldn’t have touched it until I was 60, if it had actually survived, so I didn’t calculate all of those earnings I would miss out on. When you calculate how much money you will lose by cashing out the account, the choice will become clear. You can face a 401k early withdrawal penalty if you withdraw money before retirement age and various exceptions don't apply. I can easily make up the difference when I start working again in a few years, no harm no foul. Sorry, your blog cannot share posts by email. Even though you can cash out your 401k, it should be a last resort. The cash didn’t last very long at all unfortunately. You had taxes withheld like from your paycheck. Whether you should cash out your 401k before turning 59 and a half is another story. Did I still take the cash out? 1) When cashing out your 401K, where you earned the money is not normally a factor. Fortunately, I was able to start saving again within a year or two of cashing it out, but I still missed out on the total gains it would still be making right now if I had just left it alone. 2 And the picture is even worse for younger workers. Even the amount was about the same (around $12k, or closer to $7k after taxes). Yes, we could keep growing our savings and retirement nest egg, while working, but trading those earnings for missing out on being more active in my kids lives is definitely not worth it to me. I look back on it now and shake my head that I could be so financially ignorant, but I just thought of the near future and not the retirement future, and that is what kept me thinking, “This is a good decision, and I can recover from it in no time.”. It was a great school with a top-notch reputation, and I would practically be guaranteed an almost 6-figure salary when I graduated. I loved that SUV. They look cooler! *shrug* All my 401k s roll over into Vanguard. A few days later they called and said, “Well, because of your credit score not being stellar, and the fact that you don’t have a job, the banks aren’t wanting to loan you any money right now. Even better, what did you learn from them? First, you must pay an immediate 10% penalty on the amount withdrawn. Thanks for the great read. I got a statement from ING yesterday saying my balance was ZERO. You'll owe a 50% excise tax on the amount you should … Bad Decisions Part 3: Easier credit, harder payments, You’re Promoted! I got denied my unemployment benefits in January and had to take my 401k out total of only $12,000 paid off medical bill and my car. If you don't take money out of your retirement account when required, the penalties are harsh. If your RMD is $20,000 … Don't Tap Your 401k to Pay Off Debt If you take money out of your 401k to pay off your debts, you may regret it later. Wow! You didn't actually pay the tax or 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). If you withdraw money before age 59 1/2, you'll pay a 10% early withdrawal penalty. If it weren’t for that money, I couldn’t have afforded my home and retirement savings. That money can help me more now.”  I had applied for some student loan help already (see Bad decisions: It’s raining student loans! This left me with a decision to make regarding my 401k. My last one from my previous job got rolled into vanguard, well, they already used them, and the fees were the same as our accounts (really low) so no need to do anything really. This could grow to over $170,000 by the time we turn 60, and luckily, my good decisions should buffer Mr. SSC’s nasty financial mistakes. Even my financial person did their best to talk me out of it at the 11th hr. This week, I … This is true even if you have a 401(k) plan with your new employer. In addition, if you were younger than age 59 1/2 when you cashed in your 401 (k), then you'll need to file IRS Form 5329 along with your return. If you don't withdraw enough to meet the year's RMD by Dec. 31, you pay a 50 percent penalty tax on what you didn't take out. By cashing it in, I was only counting the $8-9k I could get in the short term, which yes was more than I put into it at the beginning, so I didn’t short myself there. Don’t be stupid, just roll it over into an IRA.” “Why would you want to cash it out, you’ll get hit with taxes and penalties, you won’t even be able to keep half of it!” But I just thought, “Ha-ha! Since the time of my employment I had been contributing to a 401k, and 403b after company changed policies. We become like that to which we are devoted. I shake my head how I was able to justify doing that regardless of whatever people were telling me. They withhold 20% federal tax right off the bat. 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