Cashing out 401k is possible especially if a person has a valid reason to do so. However, whether you like it or not, you will be charged with a 10% penalty and other taxes that are due. In the U.S., people who decide to cash out their account will face 30 to 40% of penalty which will go away towards the government.
There are several ways in which a person can access their 401k account without the penalties. One of this is a loan from 401k, which is not taxed nor is there a 10% penalty. Expert say that in this kind of loan, a preset interest rate is expected which applies and the fund used to pay back the loan is also taxed by the government.
Before you can avail of the 401k loans, your application must be authorized and approved by the 401k administrator. Some of the valid reasons include buying of a new home, secondary education and medical expenses. The term of this loan will not exceed 5 years and its payments must be made one every quarter of the year.
One of the painful facts about cashing out a 401k account is that the money will no longer collect interest unless the loan is repaid and the process of getting the account into its normal status is restored. Some people think that this policy is fair and reasonable because 401k should be untouchable. There are some who were charged of 40% from cashing out 401k but still think it’s fair. If you don’t know, the main reason why 401k is made by the government is that it will become the source of income when a person reaches the age of 59 and a half. In addition, 401k will also supplement any Social Security payment.
Before making a decision to cash out your 401k account, it is essential to seek a 401k advice from licensed professional especially when dealing with income tax laws and other related matters. You can also search online for additional information which can be obtained from forums and frequently asked question sections.