How to Use a 401k Cash Out Calculator

There isn’t a single decision you will make that rivals the importance of financial planning. Unlike what you eat for breakfast, or what model your next car will be, the decisions you make for retirement follow you for the rest of your life.

One common concern among savers is when they can afford to make a 401k cash out, when they should move funds instead to an IRA or new 401k, and what price do they really pay to access their money early? There is plenty of reason for concern in this regard, since every decision you make in the present has multiples the impact in the future.

401k Cash Out Calculator: Revealing the True Costs


Even while using a 401k cash out calculator, few realize that there are two different costs of cashing out a 401k pre-retirement age. The first cost is an opportunity cost. While this cost is not tangible (it always goes unnoticed), it is very much a real cost to your retirement portfolio. This cost is the lost growth of your assets if you had instead kept your cash in the 401k.

The second cost is the tax rate charged to your retirement funds, as well as any applicable fees charged for early withdrawal. Consider for a moment that all contributions to a 401k are made pre-tax, thus lowering your total taxable income, and that this money is taxed upon withdrawal, whether these withdrawals are made today or ten years from now. Next, consider the 10% early withdrawal penalty, which may stand to double the effective tax rate you pay on the money.

While it is true that you will pay taxes on a 401k whether it is withdrawn now or in the future, chances are good that you will fall into a lower tax bracket at retirement than you would during your prime working years. This disparity often allows retirees to draw on their pre-tax money at a price far lower than they would have paid to withdraw it decades earlier. Using a 401k cash out calculator can help you ascertain what the true costs are now and in the future.

Using a 401k Cash Out Calculator When You are Young


Let’s face it: it is the youngest savers who are most prone to make serious financial errors, including, but not at all limited to, making 401k cash outs early. Assume for a moment that you are a 30-something actively saving for retirement but in need of cash now.

You could:

• Cash out and get hit with a 10% penalty off the top, plus your tax rate
• Take a loan out against your 401k, if possible
• Take a loan out elsewhere

Of these options, the best choice is choice three, take a loan out elsewhere, and the worst choice is to cash out now. At this age, you’re quickly climbing the earnings latter, while slowly reaching an age at which you begin the shift from equity to fixed-income. Withdrawing now means higher taxes plus less make up time for the future. The best case scenario would be to tap other credit lines before accessing your 401k. Should the worse come to worst, consumer loans are easily discharged, and believe it or not, a 401k is a protected asset in bankruptcy. Risk the money of others first, then your own.

In your older years, early cash outs may make more sense, depending on your availability to borrow. If you project that you’ll retire soon anyway, the 10% fee is far more justifiable, since it is often a price lower than the cost to borrow. (A 10% fee over the course of 10 years is an APR of less than 1%.)

Use a 401k cash out calculator to accurately determine what the true costs are of your decision before you decide to tap into your nest egg.
Tim Ord
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