You must be aware of the fact that when you cash out your 401(k) retirement accounts before the age of 59 ½, you actually lose a substantial amount of money. When you withdraw an amount, it is treated like your regular income; therefore it is taxed. Along with it, you also have to pay 10% early withdrawal penalty if you are below 59 ½ years of age when you’re taking the money out of your retirement fund.

401(k) – What it means

A 401(k) account is actually a qualified retirement savings plan established by an employer for an employee’s retirement. Eligible employees can make annual salary contributions on a pretax basis. What actually happens is, an eligible employee authorizes pre-taxed pay to be put into the retirement savings plan. You can use your retirement savings for investment options that are allowed by your employer. The investment earnings and the contributions increase till the amount is withdrawn. You may need to pay tax on the amount withdrawn.

When you can cash out your 401(k) funds with penalty

If you’re experiencing a financial hardship and have no other way out, then you can withdraw 401(k) funds (while you’re currently working for the employer); however, you’ll have to pay 10% penalty if you cash out your 401(k) funds before the age of 59 ½ years.

You can withdraw under the following circumstances.

• If you’re experiencing severe financial hardship.
• To prevent foreclosure on your primary home.
• To purchase your primary residence.
• To pay the higher education costs for the next 12 months for you, your dependents, your spouse or your children.
• If you need to bear tax-deductible non-reimbursed medical expenses for your dependents, your spouse or yourself.

When you can cash out your 401(k) money without paying penalty

You can cash out your 401(k) money (while you’re currently working for the employer) before 59 ½ years, without paying penalty. However, it is possible only if you’re experiencing a major financial hardship and when you’re in any of the conditions given below.

• Your medical expenses have exceeded 7.5% of your gross income.
• When your age is equal to/more than 55 years.
• You become permanently or completely disabled.
• You’re ordered by a court law to give funds to a child, your divorced spouse or to your dependent.

No doubt you can withdraw your 401(k) funds with an employer, who has sponsored your retirement plan. However, when you do so, you’ll have to pay 20% federal tax apart from paying 10% penalty. Thus, when you switch over to a new job, you can roll over your 401(k) funds to an IRA (Individual Retirement Account) to have better control over your investments.