Can I Take My 401(k) in a Lump Sum? (2022)

You can make a 401(k) withdrawal in a lump sum, but is it a good idea to do so? Usually, the answer to that is no. Tax-deferred retirement plans, such as 401(k)s, are designed to provide income during retirement.

In most cases, if you make any withdrawal and are younger than 59½, you'll pay a 10% early withdrawal penalty in addition to income taxes on the amount you withdraw. Note that this early withdrawal penalty was not in effect for withdrawals of $100,000 or less in 2020 if you had been affected by the COVID-19 pandemic.

Here are some of the options available to withdraw a lump sum from your 401(k) and what you need to consider.

Key Takeaways

  • You can make a 401(k) withdrawal in a lump sum, but in most cases, if you do and are younger than 59½, you'll pay a 10% early withdrawal penalty in addition to taxes.
  • There were special allowances for withdrawals in 2020 for those affected by the COVID-19 pandemic.
  • You can take a 401(k) loan against your balance but will be subject to penalties if you default. Those rules were also modified in 2020.
  • A hardship withdrawal can give you retirement funds penalty-free, but only for specific qualified expenses and you’ll still owe taxes.
  • You are limited to the lump-sum withdrawal options your plan allows.

Lump-Sum Withdrawal Options While Employed

Some companies automatically enroll eligible workers in a 401(k)—they can opt-out—while others let employees choose if and when they participate. Employers often rely on a plan sponsor to educate employees on the investments, benefits, and contribution limits of a 401(k) plan.

(Video) Should I Take The Lump Sum Retirement Option?

The majority provide sufficient direction to employees when they begin contributing to the plan, but they often fall short of providing useful information when employees change jobs, retire, or need to withdraw money from their plans.

If you currently work for an employer with an active 401(k) plan, you are limited to the lump-sum withdrawal options indicated in the original plan document. This generally means that, while you may access a portion of it, you cannot simply cash it out. The two most common lump-sum withdrawal provisions come in the form of a hardship withdrawal or a loan against your 401(k) balance.

Hardship Withdrawals

A hardship withdrawal is a lump-sum withdrawal based on financial need that you do not need to repay. A hardship withdrawal must meet the plan's criteria, such as covering crippling medical expenses, to avoid paying the 10% early withdrawal penalty. You'll still owe income taxes on the amount withdrawn.

On March 27, 2020, President Trump signed a $2 trillion coronavirus emergency relief bill, called the CARES Act, into law. It allowed those affected by the coronavirus pandemic in 2020 to take a distribution of $100,000 or less without the 10% penalty those younger than 59½ normally owe.

Account owners also have three years to pay the tax owed on withdrawals, instead of owing it in the current year. Or, they can repay the withdrawal during that period to a 401(k) or IRA plan and avoid owing any tax—even if the amount exceeds the annual contribution limit for that type of account.

There is another case where plan holders can make a lump-sum withdrawal from their plans without incurring the 10% penalty. According to Section 113 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act—signed into law in December 2019—new parents are allowed to withdraw a maximum of $5,000 from their plans penalty-free to pay for adoption or birth expenses.

401(k) Loans

A 401(k) loan is typically paid back through paycheck deferrals over time. Except under the 2020 law, the loan is capped at a certain percentage of your total 401(k) balance; the IRS allows up to 50% and a maximum of $50,000 of vested funds, whichever is less.

(Video) How to pay your 401(k) loan in a lump sum?

If you have a 401(k) plan with the ability to take out a loan, you can withdraw the funds tax-free. Of course, you will have to pay them back, but this allows you to borrow from your 401(k) account and pay yourself back the interest and principal over time.

The CARES Act doubled the amount of 401(k) money available as a loan to $100,000 in 2020, but only if you had been impacted by the COVID-19 pandemic.

Options When You Leave an Employer

Lump-sum withdrawal options are not as limited when you leave an employer for another job or if you retire. You can take a penalty-free lump-sum distribution from a previous employer’s 401(k) plan up to the total vested account balance. After placing a distribution request, the plan sponsor or custodian sends a check directly to you, and the account is closed with the custodian.

If you have a Roth 401(k) balance, no taxes are withheld—with traditional pre-tax traditional 401(k) plans, sponsors withhold taxes from the balance before cutting the check. In either case, if you are under 59½, you are subject to a 10% tax penalty.

You can avoid taxes and penalties by rolling over the lump-sum withdrawal into an individual retirement account (IRA). In this case, the check is made out to the custodian of the IRA, not to you—although it should be marked “for the benefit of” you. As you never received the funds in cash, you are not taxed.

(Video) 401K Distribution After Death - Lump Sum Payout

If you're switching jobs, another option is to roll over the 401(k) into the 401(k) at your new employer, if that new plan allows for this option. Review all your choices carefully before you decide.

Funds withdrawn from your 401(k) must be rolled over to another retirement account within 60 days to avoid taxes and penalties.

Special Considerations for Withdrawals

The greatest benefit of taking a lump-sum distribution from your 401(k) plan—either at retirement or upon leaving an employer—is the ability to access all of your retirement savings at once. The money is not restricted, which means you can use it as you see fit. You can even reinvest it in a broader range of investments than those offered within the 401(k).

Since contributions to a 401(k) are tax-deferred, investment growth is not subject to capital gains tax each year. Once a lump-sum distribution is made, however, you lose the ability to earn on a tax-deferred basis, which could lead to lower investment returns over time.

Tax withholding on pre-tax 401(k) balances may not be enough to cover your total tax liability in the year when you receive your distribution, depending on your income tax bracket. Unless you can minimize taxes on 401(k) withdrawals, a large tax bill further eats away at the lump sum you receive.

(Video) Your 401k – How do you use it? What are the 401k withdrawal rules?

Finally, having access to your full account balance all at once presents a much greater temptation to spend. Failure in the self-control department could mean less money in retirement. You are better off avoiding temptation in the first place by having the funds directly deposited in an IRA or your new employer's 401(k) if that is permitted.

How Much Will I Get If I Cash Out My 401(k)?

If you cash out the entirety of your 401(k) you will get whatever is left over after taxes (and penalties if you are younger than age 59.5). So, if you were 60 years old and had $1,000,000 in your 401(k), and you were in the 25% tax bracket, you would receive $750,000. If you were, say age 50 and in the same tax bracket, you would be subject to an additional $100,000 early withdrawal penalty, leaving you with $650,000.

What Counts As a Hardship Withdrawal?

Hardship withdrawals can allow you to take out 401(k) money without paying the 10% early withdrawal penalty (but you'll still owe the deferred tax liability). Qualified reasons include certain medical expenses, qualified education expenses, the birth or adoption of a child, purchasing a first home, funeral expenses, and permanent disability.

Can I Take My 401(k) in Installments?

Yes. In retirement, you can withdraw only as much as you need to live, and allow the rest to remain invested. You can also choose to use your 401(k) funds to purchase an annuity that will pay out guaranteed lifetime income.

(Video) How to Withdraw from 401k after age 60 - How to Withdraw from 401ks after Age 60

FAQs

Can I close my 401k and take the money? ›

Cashing out Your 401k while Still Employed

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.

Can I cash out all of my 401k? ›

Although legally, you have every right to liquidate your old 401(k) account and cash out the entire funds, doing so would reduce your savings for the retired life. Additionally, the distributions will add up to your annual taxable income.

What is the best way to take money out of 401k? ›

Here are the ways to take penalty-free withdrawals from your IRA or 401(k)
  1. Unreimbursed medical bills. ...
  2. Disability. ...
  3. Health insurance premiums. ...
  4. Death. ...
  5. If you owe the IRS. ...
  6. First-time homebuyers. ...
  7. Higher education expenses. ...
  8. For income purposes.
25 Mar 2022

What is one disadvantage to taking a lump sum distribution from your 401 K when you retire? ›

Taking a lump sum distribution from your 401(k) can significantly reduce your retirement savings, and is generally not advisable unless you urgently need money and have no other alternatives. Not only will you miss out on the continued tax-deferral of your 401(k) funds, but you'll also face an immediate tax bite.

How much will I get if I cash out my 401k? ›

Traditional 401(k) (age 59.5+): You'll get 100% of the balance, minus state and federal taxes. Roth 401(k) (age 59.5+): You'll get 100% of your balance, without taxation. Cashing out before age 59.5: You will be subject to a 10% penalty on top of any taxes owed.

How much taxes will I pay if I withdraw my 401k? ›

If you remove funds from your 401(k) before you turn age 59 1⁄2 , you will get hit with a penalty tax of 10% on top of the taxes you will owe to the IRS.

Can a company refuse to give you your 401k? ›

Employers can refuse access to your 401(k) until you repay your 401(k) loan. Additionally, if there are any other lingering financial discrepancies between you and your former employer, they may put on your 401(k) hold.

What do I do with my 401k after I quit my job? ›

Key Takeaways. If you change companies, you can roll over your 401(k) into your new employer's plan, if the new company has one. Another option is to roll over your 401(k) into an individual retirement account (IRA). You can also leave your 401(k) with your former employer if your account balance isn't too small.

How do I avoid taxes on my 401k withdrawal? ›

The easiest way to borrow from your 401(k) without owing any taxes is to roll over the funds into a new retirement account. You may do this when, for instance, you leave a job and are moving funds from your former employer's 401(k) plan into one sponsored by your new employer.

Can I transfer my 401k to my checking account? ›

Once you have attained 59 ½, you can transfer funds from a 401(k) to your bank account without paying the 10% penalty. However, you must still pay income on the withdrawn amount. If you have already retired, you can elect to receive monthly or periodic transfers to your bank account to help pay your living costs.

Is it better to take lump sum or monthly payments on 401k? ›

In most cases, the lump-sum option is clearly the way to go. The main difference between a lump-sum and a monthly payment is that with a lump-sum option, you get to have control over how your money is invested and what happens to it once you're gone. If that's the case, then the lump-sum option is your best bet.

Why should you not cash out your 401k? ›

The IRS will penalize you. If you withdraw money from your 401(k) before you're 59½, the IRS usually assesses a 10% penalty when you file your tax return. That could mean giving the government $1,000 or 10% of that $10,000 withdrawal in addition to paying ordinary income tax on that money.

Does withdrawing money from 401k affect Social Security? ›

Income from a 401(k) does not affect the amount of your Social Security benefits, but it can boost your annual income to a point where they will be taxed or taxed at a higher rate.

How much should I have in my 401k at 55? ›

By age 50, retirement-plan provider Fidelity recommends having at least six times your salary in savings in order to retire comfortably at age 67. By age 55, it recommends having seven times your salary.

What age can you take your 401k without paying taxes? ›

The 401(k) Withdrawal Rules for People Older Than 59 ½

Stashing pre-tax cash in your 401(k) also allows it to grow tax-free until you take it out. There's no limit for the number of withdrawals you can make. After you become 59 ½ years old, you can take your money out without needing to pay an early withdrawal penalty.

Do you get taxed twice on 401k withdrawal? ›

But, no, you don't pay taxes twice on 401(k) withdrawals. With the 20% withholding on your distribution, you're essentially paying part of your taxes upfront. Depending on your tax situation, the amount withheld might not be enough to cover your full tax liability.

Do I have to pay taxes on my 401k after age 65? ›

When you withdraw funds from your 401(k)—or "take distributions," in IRS lingo—you begin to enjoy the income from this retirement mainstay and face its tax consequences. For most people, and with most 401(k)s, distributions are taxed as ordinary income.

How long can you leave your 401k at your old job? ›

There's no time limit on how long you can keep your 401(k) after leaving your job. You can leave it in your former employer's plan, roll it into an IRA, or cash it out. Each option has different rules and consequences, so it's important to understand your choices before making a decision.

How long can a company hold your 401k after you leave? ›

For amounts below $5000, the employer can hold the funds for up to 60 days, after which the funds will be automatically rolled over to a new retirement account or cashed out. If you have accumulated a large amount of savings above $5000, your employer can hold the 401(k) for as long as you want.

Can you lose your 401k if you get fired? ›

With the exception of certain company contributions, the money in your 401(k) plan is yours to keep, even if you lose your job.

What happens to my 401k if I quit or get fired? ›

If you've been let go or laid off, or even if you're worried about it, you might be wondering what to do with your 401k after leaving your job. The good news is that your 401k money is yours, and you can take it with you when you leave your old employer.

Can I cash out my 401k from previous employer? ›

Technically, yes: After you've left your employer, you can ask your plan administrator for a cash withdrawal from your old 401(k). They'll close your account and mail you a check. But you should rarely—if ever—do this until you're at least 59 ½ years old!

Is it better to have 401k taken out before or after taxes? ›

If you are going to be in a lower tax bracket in retirement than you are now, it would generally be beneficial to go with the pre-tax contributions. If you are going to be in a higher tax bracket in retirement than you are now, it woud generally be beneficial to go with the after-tax contributions.

Can I move 401k funds to cash? ›

You can roll funds from an old 401(k) into another tax-advantaged retirement account, cash it out, or keep it with an old employer.

How much does a $50000 annuity pay per month? ›

A $50,000 annuity would pay you approximately $219 each month for the rest of your life if you purchased the annuity at age 60 and began taking payments immediately.

Is $100 a month good for 401k? ›

Your Retirement Savings If You Save $100 a Month in a 401(k)

If you're age 25, and have 40 years to save until retirement, depositing $100 a month into a savings account earning the current national interest rate of 0.10% APY would leave you with $48,974.93 in before-tax savings.

Will my monthly payments go down if I pay a lump sum? ›

When you make a lump-sum payment on your mortgage, your lender usually applies it to your principal. In other words, your mortgage balance will go down, but your payment amount and due dates won't change.

Why are people cashing out their 401k? ›

You'll Be Robbed of Future Retirement Savings

Cashing out your 401(k) does give you much more immediate access to funds than other alternatives. So, some do use it as a temporary fix for things like debt. For example, if you lose your job, money from the 401(k) can help cover living expenses while you job search.

What happens when I cash out my 401k? ›

Taking a withdrawal from your traditional 401(k) should be your very last resort as any distributions prior to age 59 ½ will be taxed as income by the IRS, plus a 10 percent early withdrawal penalty to the IRS. This penalty was put into place to discourage people from dipping into their retirement accounts early.

Is it better to take Social Security or withdraw from 401k? ›

In fact, using a 401(k) first and putting off claiming Social Security means that the benefit payments will be higher. Plus, unlike 401(k)s and most other retirement accounts, Social Security can't run out.

How much Social Security will I get if I make $25000 a year? ›

So, if you have a part-time job that pays $25,000 a year — $5,440 over the limit — Social Security will deduct $2,720 in benefits. Suppose you will reach full retirement age in 2022.

At what age is Social Security no longer taxed? ›

However once you are at full retirement age (between 65 and 67 years old, depending on your year of birth) your Social Security payments can no longer be withheld if, when combined with your other forms of income, they exceed the maximum threshold.

What is the main disadvantage of lump sum taxes? ›

The main disadvantage of lump-sum taxes is the inefficient allocation of resources due to its regressive nature. The tax incidence of low-income earners is greater than that of higher-income groups.

What happens if I cash out my 401k when I retire? ›

From time to time, you may be eager to tap into your funds before you retire. However, if you succumb to those temptations, you will likely have to pay a hefty price—including early withdrawal penalties and taxes such as federal income tax, a 10% penalty on the amount that you withdraw, and relevant state income tax.

Should I take a lump sum distribution from my pension? ›

Lump-sum payments give you more control over your money, allowing you the flexibility of spending it or investing it when and how you see fit. Studies show that retirees with monthly pension income are more likely to maintain their spending levels than those who take lump-sum distributions.

What are disadvantages of lump sum investing? ›

Cons
  • In order to make a lump-sum investment you need to have a lump sum to invest. If you receive a lump sum or have accumulated a large sum to invest, that's great. ...
  • A lump-sum investment is made at a point in time. The price you pay for the investment(s) may be high or low.
31 Mar 2022

How do I avoid paying tax on a lump sum? ›

Investors can avoid taxes on a lump sum pension payout by rolling over the proceeds into an individual retirement account (IRA) or other eligible retirement accounts.

How can I avoid taxes on a lump sum payment? ›

You may be able to defer tax on all or part of a lump-sum distribution by requesting the payer to directly roll over the taxable portion into an individual retirement arrangement (IRA) or to an eligible retirement plan.

Why is it better to take the lump sum? ›

The advantage of a lump sum is certainty — the lottery winnings will be subjected to current federal and state taxes as they exist at the time the money is won. Once taxed, the money can be spent or invested as the winner sees fit. The advantage of the annuity is the exact opposite — uncertainty.

What is the average 401K balance for a 65 year old? ›

$255,151

How much should I have in my 401K at 55? ›

By age 50, retirement-plan provider Fidelity recommends having at least six times your salary in savings in order to retire comfortably at age 67. By age 55, it recommends having seven times your salary.

Do I have to pay taxes on my 401K after age 65? ›

When you withdraw funds from your 401(k)—or "take distributions," in IRS lingo—you begin to enjoy the income from this retirement mainstay and face its tax consequences. For most people, and with most 401(k)s, distributions are taxed as ordinary income.

What is a good pension amount? ›

For a quick estimate, try the '50-70' rule. This suggests that you should aim for an annual income that is between 50 and 70 per cent of your working income.

How much tax do you pay on a pension lump sum? ›

Generally, the first 25% of your pension lump sum is tax-free. The remaining 75% is taxable at the same rate as income tax. The tax-free lump sum does not affect your personal allowance.

Does a lump sum pension affect Social Security? ›

If you take your government pension annuity in a lump sum, Social Security will calculate the reduction as if you chose to get monthly benefit payments from your government work.

Do lump sum get taxed more? ›

Lump-sum taxes

Lump-sum distributions can kick you up into a higher tax bracket. For example, if in retirement you have $9,000 per year in taxable income, you'd likely be in the 10% tax bracket in 2021.

Is it better to invest lump sum or monthly? ›

You're more likely to end up with higher returns.

Lump-sum investing outperforms dollar cost averaging almost 75% of the time, according to data from Northwestern Mutual, regardless of asset allocation. If you're comfortable with risk, then investing your money in one large sum could yield better results.

What is the best way to use a lump sum? ›

If you receive a lump sum of money, it's important to consider how you can use it to achieve your financial and personal goals.
  1. Pay down debt: One of the best long-term investments you can make is to pay off high-interest debt now. ...
  2. Build your emergency fund: ...
  3. Save and invest: ...
  4. Treat yourself:

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