Early 401(k) Withdrawal Costs How Much?
For instance, Rollover estimates that a 35-year-old participant with a $5,000 balance in his 401(k) will pay $500 in penalties and $1,500 in taxes -- stealing away 40% of his cash. Had the employee rolled over the savings into an IRA with an 8% return, then by the age of 65 he would have more than $50,000.
While small balances are more frequently cashed out, larger balances take bigger hits on compounding interest. A 45-year-old with $50,000 might pay $20,000 in penalties and taxes if he cashes out. However, he would earn $183,000 in interest had he left the retirement savings alone for 20 years.
"It's surprising how many people don't understand the long-term ramifications," says Langenwalter. "Just like it's surprising in high school they don't teach kids how to balance their checkbook, and they should. Some folks think they have their whole life ahead of them and they can just cash it out now."
Rollover offers a cash-out calculator on its Web site where consumers can find out the taxes and penalties they'd have to pay as well as what they would earn in interest by entering their age, planned retirement age, plan balance and expected rate of return.
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