If you resign or get fired, you can withdraw the money in your account, but again, there are penalties for doing so that should cause you to reconsider.
You will be subject to 10% early withdrawal penalty and the money will be taxed as regular income.
And that’s if your employer’s retirement plan allows it.
They are not required to offer hardship distributions, so the first step is to ask the Human Resources department if this is even available.
So, let’s say at age 40, you have $50,000 in your 401k and decide you want to cash out $25,000 of it.
For starters, the 10% early withdrawal penalty means you only get $22,500.
Experts would advise against it because it negates the impact of compound interest and time that really grow a retirement account.
However, there are specific hardship situations that happen in people’s lives and if the money in a 401k account is the only way to address them, then it can be done. Even in hardship situations, the penalties are harsh and costly. If you are younger than 59 and a half, you’re going to have to demonstrate that you have an approved financial hardship to get money from your 401k account.
Later, you must include the amount withdrawn as income when you file taxes.
Even further down the road, there is severe damage on the long-term earning potential of your 401k account.
The biggest disadvantage is the penalty the IRS applies on early withdrawals.