When you want money to buy a large item such as a car or a house, withdrawing it from your old 401(k) might sound like a good idea. After all, the money is yours if you are fully vested, and you can do with it what you want. The more you think about it, cashing out your 401(k) may seem like a good idea—but it really is not.
The Penalty
If you are not yet 59½, you must pay a 10 percent 401(k) early withdrawal penalty on whatever amount you withdraw. It could be a rather hefty sum. In addition to the early withdrawal penalty, you must pay income taxes on a 401(k) withdrawal.Income taxes vary according to your income. In 2024, the brackets start at 10 percent, then go up to 12 percent, 22 percent, 24 percent, etc. If you have $15,000 in your 401(k) and are in the 24 percent tax bracket, when you cash it out, you will have to pay $3,600 in taxes, plus the 10 percent penalty of $1,500. Altogether, you will lose $5,100, leaving you with $9,000. That is quite a loss.
