US retirement account cash-out rules & penalties
Liquidating a 401(k) or Traditional IRA before reaching age 59½ incurs a mandatory 10% IRS early distribution penalty under IRC § 72(t), plus federal and state income taxes on the entire distributed sum.
For 401(k) plans, plan administrators are legally required to withhold a mandatory 20% upfront for federal income taxes on cash distributions.
Worked example: Cashing out a $50,000 401(k) before age 59½
Cashing out a $50,000 pre-tax 401(k) at age 45 incurs a $5,000 (10%) early withdrawal penalty. In the 22% federal bracket plus 5% state tax, total income tax is $13,500. Total tax and penalties equal $18,500 (37% effective rate), leaving just $31,500 in net cash.
Inputs for the us cashing in pension calculator
Distribution & Age
Enter the gross distribution amount and your current age to check for the 10% penalty.
CALCULATOR QUESTIONS
US cashing in pension calculator questions
What is the Rule of 55 for 401(k) plans?
If you leave or are laid off by your employer in the calendar year you turn 55 or older, you can withdraw funds from that employer 401(k) plan penalty-free (though income taxes still apply).
What is a direct rollover?
Performing a direct trustee-to-trustee rollover into a Traditional or Roth IRA transfers funds without incurring income taxes, penalties, or mandatory 20% withholding.