Cashing Out a 401(k) During COVID-19 Through the CARES Act The CARES Act was signed into law in March in response to the effects of the COVID-19 pandemic. Market data powered by FactSet and Web Financial Group. Plus, consider the damage you could do to your retirement security by not letting that money grow and compound for your future. Your input will help us help the world invest, better! If you become totally or permanently disabled, you can cash out at any time. If you're one of the many workers whose job has been affected, you have a lot on your plate right now. Instead of cashing out your ESOP after leaving the company, consider rolling it into another qualified retirement plan. If your work is affected due to coronavirus and you have to make a decision about your retirement account, consider the big picture -- including future financial security as well as account fees -- when you decide what to do with your money. If you are a qualified military reservist called to active duty. 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. You can avoid the penalty by cashing out in a series of "substantially equal payments" over the rest of your expected lifetime. You have multiple options for moving your account. 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 Unless your 401(k) is of the Roth variety, all of the money you withdraw will be treated as taxable income, no matter how old you are or the reason for the withdrawal. Typically, when you leave a job with a defined benefit pension, you have a few options. Employer-sponsored, tax-deferred retirement plans like 401(k)s and 403(b)s have rules about when you can access your funds. But remember—you didn’t pay taxes on dollars directed from your salary to your 401(k). If you’re getting ready to leave a job, you might be considering cashing out your 401(k) retirement plan.But in addition to losing the benefits your 401(k) plan offers, depending on your age, you’ll likely have to pay a penalty for early withdrawal in addition to paying income tax on the money you receive from cashing out. You'll be robbing yourself of funds you need for your future. Cashing out your 401(k): Be aware that there are penalties for early withdrawal from retirement accounts. The biggest downside of moving your 401(k) money into an IRA is that you typically have to sell your stock to do it. Stock Advisor launched in February of 2002. 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. Here's what you need to know about them. In addition to owing income taxes, you'll also be required to pay to an additional 10% early withdrawal penalty unless you're over 59 1/2 years old or meet one of the IRS's exceptions, which we'll cover in a moment. 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. This includes any money you've contributed and any vested contributions from your employer -- plus any investment profits your account has generated. Cashing out 401k in early thirties to pay off debt with career transition: How bad of an idea is this? How to cash out and the implications of doing so The procedure for cashing out is usually rather simple. If you're leaving your job, you have three primary choices, only two of which are good ones. Returns as of 01/25/2021. 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. That is, you can start taking some money out without paying a 10% tax penalty for early withdrawal. So for example, I pull out $28,571 and pay the 30% taxes and penalties to net $20,000. 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. Stock Advisor launched in February of 2002. Factors to Consider Before Cashing Out a 401(k) Think carefully about the long-term repercussions before taking money out of a 401(k). If you get terminated from your job, you have the ability to cash out the money in your 401(k) even if you haven't reached 59 1/2 years of age. A 401k is a tax-deferred account, meaning the IRS enforces several restrictions regarding access to the funds inside. If you moved it to a Roth instead, you'd end up owing income taxes on the money, although you'd benefit from being able to make tax-free withdrawals in retirement. Cash out your 401(k) If you no longer want your money to go toward your retirement and just prefer to spend the money as you please, you may decide to cash out your 401(k) account. However, there are a few things you need to keep in mind, especially regarding the tax implications of cashing out. But while you can take at least some money out of your account without penalty, the ordinary income taxes you'll owe could still be quite high. If you're leaving your job, don't forget about your 401(k) plan. One decision you don't want to let fall through the cracks is the choice about what to do with your 401(k). Let me say this again: As tempting as it may be to cash out an old 401(k), it’s a poor financial decision. 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. And you can avoid plan management fees and open up the door to more investment choices. Here’s what to consider. This rule applies even if you’ve reached age 59 1/2. Market data powered by FactSet and Web Financial Group. Another advantage of cashing out a 401k is that an individual can use the money as he or she sees fit. You can choose to take the money as a lump sum now, or take the promise of regular payments in the future, also known as an annuity. 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. You can begin taking qualified distributions from any 401(k), old or new, after age 59½. Thanks -- and Fool on! Or your company can write a check to you, in which case you'll need to deposit the money into your new account within 60 days. Cumulative Growth of a $10,000 Investment in Stock Advisor, Copyright, Trademark and Patent Information. Textbook contributor. So, even if you are older than 59 1/2, it's important to consider how cashing out will affect your tax status for the year. The coronavirus crisis has led to an unprecedented number of layoffs across the country. 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. Normally, you pay a 10% penalty on early withdrawals from a 401(k), in addition to being taxed at your ordinary rate on withdrawn funds. Another option, and the best one for many people, is to do a rollover of your 401(k) funds into an IRA. The information contained in this article is not financial or legal advice and is not a substitute for such advice. 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