What is the Penalty for Cashing Out a 401k?

A 401k is one of the best ways to save for a retirement. The start of the 1980s saw the birth of this helpful monetary contribution fund. These accounts have become so popular that millions of Americans are now using them to plan out their future. While these plans are useful, there are some drawbacks when you want to cash out your accumulated funds. You should understand what is the penalty for cashing out a 401k before you take a distribution. Many account holders have to learn the hard way about early distribution fees. 


Penalty for Cashing Out a 401K

Congress enacted the section 401k in 1978 and deemed these accounts strictly be used for retirement savings. An age limit was put into law that specifies the earliest age you can start withdrawing your money. Since some retirement begins at age 62, arriving at the age of 59½ will generally allow you to take money without penalty. The current penalty is 10 percent of your account balance. For someone that has saved for extended periods of time, this penalty can be a costly reminder of the price of a federally regulated account.

The average person is eligible to receive employer contributions to a 401k account. This matching system can grow an account quickly. Many real estate investors cash out a 401k to get started buying property. While it is perfectly normal to cash out these accounts, doing so at the right time and understanding tax implications is always best. A self-directed 401k account can be used to invest in things like real estate and allow you to have control instead of a separate trustee. 


Tax-Free Growth and Real Estate

A 401k does have tax benefits and buying real estate with a 401k does help. Since a 401k is allowed to grow tax-free, the average earner can quickly accumulate enough money to buy a first investment property without wiping out an entire account. The price of investment property has fallen considerably in the past 5 years. Homes that used to be $100,000 are hovering around the $69,000 range.

With real estate getting upwards of 15 percent a year or higher returns, investing in property has become one way that investors and those retiring soon can quickly grow wealth. Using a 401k before age 59½ is not impossible and mixing a distribution with other sources of funding like cash or financing can help you buy a turnkey investment property quickly.

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