Experts say cashing out your 401(k) can be a costly mistake

Financial experts are warning individuals who have been laid off from their jobs to avoid withdrawing their 401(k) funds unless they wish to face big financial consequences when tax time comes.

Pensions expert Anne Lester he said CNBC Make It says the “long-term consequences” of withdrawing from a 401(k) plan early or before age 59 and 6 months could be “very painful.”

The creator of an upcoming book said that withdrawing from a 401(k) before retirement age could end in serious tax consequences and the necessity to start out your retirement goals another time.

Lester explained that the quantity a person has of their 401(k) account may differ from the actual amount they can withdraw.

“You can take a look at the number in your 401(k) and think, ‘Oh my God, I actually have $100,000,’ but you do not even have $100,000. Depending on your tax bracket, it’s possible you’ll only receive half of this amount.

Paying income tax on the quantity collected is one thing. But CNBC Do it reported According to the IRS, a person may be assessed an extra 10% tax penalty. In summary, taxes and penalties can reduce the quantity a person can actually get from a 401(k) plan.

Sacrificing growth in savings already accrued through compound interest is one other consequence of withdrawing from a 401(k) too early.

Ed Slott, publisher of IRAHelp.com, he said“The greatest money-making asset anyone can have is time,” CNBC Make Itrecorded. Withdrawing your funds is basically the identical as starting to save lots of for retirement again. It may be difficult to rebuild funds to previous levels.

Not all hope is lost. Lester outlined alternative options resembling emergency savings, one other source of income, 0% interest bank cards or unemployment advantages to assist cover living costs.

Although Lester noted that a bank card should be a last resort because debt can change into a problem because of high rates of interest.

According to the outlet, Lester said an application for unemployment advantages should be filed “as soon as possible.”

“This is not the time to think, ‘Oh, I can’t do this,’” Lester said. “This is embarrassing.’ There’s no shame in being laid off or receiving unemployment benefits.” Eligibility varies by state. Generally, a person may qualify in the event that they were laid off from their job through no fault of their very own, CNBC Make Itnoted. The amount a person will receive will be based on a percentage of her earnings over the past 52 weeks and limited to the utmost amount applicable in her state.