How to Cash Out a 401(k) to Pay Off Debt
A 401k is a retirement plan offered by some employers. Employees with a 401k option may choose to have a portion of their earnings placed into the 401k every pay period. The total amount of the 401k is then invested and the employee reaps the benefits of those investments at retirement. Occasionally, employers will contribute to the 401k plans of their employees. Cashing out a 401k is possible but pricey.
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Instructions
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Weigh the pros and cons of cashing in your 401k to pay a debt. If the debt is small, you may be able to work out a payment plan with the creditor. If the debt is unsecured, consider the consequences of nonpayment (charge-offs, damage to your credit report, etc.) and decide if those consequences are substantial enough to merit pulling out your 401k early and losing a percentage of your investment to taxes.
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Check to see if your 401k is "vested." Vesting occurs after you have worked for your employer a certain amount of time. You may not be able to access your employer's contribution to your 401k until you are vested.
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Consider borrowing against your 401k plan rather than cashing it out. Some companies will allow employees to borrow up to half of their vested 401k plans for personal expenses, such as paying down debts.
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Have a documented hardship. Unless you can prove that you need the money contained in your 401k to pay medical bills, pay for college, buy a home or prevent foreclosure, you will likely be unable to access your investment---even if it is vested.
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Quit your job. If accessing the money is impossible any other way and you desperately need it, you may opt to resign from your job. This will give you the choice of enrolling in a new employer's 401k plan, rolling the investment over into an IRA or cashing it out. For some individuals, this is the only way of accessing their 401k plans.
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Be prepared to pay a penalty for cashing in your 401k in addition to paying the necessary taxes. Most 401k plans will charge a 10 percent penalty fee for cashing out early. If you are over age 59, however, you may withdraw funds from your vested 401k without paying a penalty fee.
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