When you reach retirement age you can cash out money from your 401k with no withdrawal penalties. Before that time, however, it’s widely suggested that you leave that money alone to avoid losing a great deal of money, both now and in the future.
As far as retirement accounts are concerned the retirement age is fifty nine years and six months old. At this time you can start taking funds from the account without having to worry about a fee or damaging your future, this is what you saved for.
Before that time, however, there are a lot of problems. First of all there is a ten percent early withdrawal penalty. This is a straight forward fee that you will lose.
You also have to pay both federal and state taxes. Depending on your tax bracket this could easily add up to anywhere from twenty to forty percent of the amount you cash out.
Typically to find out what tax bracket you fall into you could look at your income taxes from last year and see what percentage you paid then, however, the amount you cash out will count as income for this year, raising your tax bracket and the percentage you’ll need to pay, further damaging your retirement savings and possibly the amount you can actually take.
When you cash out in retirement you will also have to pay taxes on your withdrawals, however at that point your income will hopefully be lower (meaning a small percentage goes to taxes) and your funds will have matured.
What this means is that the money you’ve saved and invested will have had time to earn returns on your investments and grow into a respectable retirement fund. Without that time you will have a much more difficult job ahead of you trying to save enough to live on and may have to put off retirement for a number of years.
Fifty nine and a half years old is the 401k retirement age with no withdrawal penalties and you shouldn’t touch your savings until that point.