- Withdrawals from a 401(k) plan are called 401(k) distributions. In general, it is advantageous for workers to wait until after they are 59.5 years old before cashing out a 401(k) plan because distributions made before that age are subject to a 10 percent tax penalty. In addition, 401(k) account holders are required to start making required withdrawals called "required minimum distributions" beginning at the age of 70.5, which means 401(k) account holders are eventually forced to cash out. The 401(k) distributions are subject to income taxes.
- Paying off debt can be a financially sound way to use some of the money cashed out of a 401(k) plan. One of the primary concerns of retirement planning is ensuring that an individual will have enough money available to survive well into old age. High interest debt like credit card debt and personal loans can make it difficult to secure long-term financial security. A sudden influx of cash from a 401(k) plan may allow a retiree to eliminate high interest debt.
- While retirees may not have the option of contribution money from a 401(k) plan to other tax advantaged retirement accounts, they can still save or invest the money in normal taxable accounts. For example, a retiree could use the money received from a 401(k) plan to purchase the same mutual funds or stocks that his 401(k) plan had invested in or choose different investments. Similarly, cash can be placed in savings account or a similar interest-bearing account like a certificate of deposit account.
- An annuity is a common type of financial product that involves paying an insurance company cash in the form of a lump sum or periodic payments in exchange for monthly income payments that continue for the rest of the retiree's life. Buying an annuity is a way to access guaranteed income for the remainder of a retiree's life, but annuities can involve certain fees that can make them more expensive than simply investing or saving money.
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