Tax consequences of liquidating a 401k

Though the only penalty imposed by the IRS on early withdrawals is the additional 10% tax, you may still be required to forfeit a portion of your account balance if you withdraw too soon.

The term "vesting" refers to the degree of ownership an employee has in a 401(k) account.

For example, if you are 45, your ,000 will grow to ,855 in 17 years.

Keep in mind that even if you really need the money, you may be better off borrowing from your 401(k) than cashing it out.

A graduated vesting schedule assigns progressively larger vesting percentages for each subsequent year of service.

In the example above, assume your employer-sponsored 401(k) includes a vesting schedule that assigns 10% vesting for each year of service after the first full year.

Depending on your plan's terms, you may be able to borrow at a lower rate from your account than you could from a bank or other lender, especially if you have a low credit score.

At the very least, you should check with your plan administrator to learn whether this option makes sense for you before you cash out.

If your 401(k) balance is composed of equal parts employee and employer funds, you are only entitled to 30% of the ,500 your employer contributed, or ,750.

This tax is in place to encourage long-term participation in employer-sponsored retirement savings schemes.

Under normal circumstances, participants in a traditional or Roth 401(k) plan are not allowed to withdraw funds until they reach age 59½ or become permanently unable to work due to disability.

If you are thinking about cashing out your 401(k) when you change jobs, think twice. You might be about to forsake a financially secure retirement.

We are using this Alert to educate investors to the potentially devastating impact cashing even a modest amount of 401(k) assets can have on retirement savings.

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