A consumer can cash out a 401k plan early, but doing so should be a last resort. These investment plans are offered by many employers and allow individuals the opportunity to plan for retirement in advance. The funds a 401k contains are not meant to be readily available until a consumer reaches retirement age. Accessing them prior to this time causes the individual to incur tax penalties.
How 401k Plans Work
When an employer offers a 401k retirement plan to its employees, the employees are given the option to set aside a portion of their paycheck to be placed into the 401k. The 401k funds are then invested. Interest accrues over time from these investments and is distributed to the employee when he or she retires and cashes out the investment. Employees are usually allowed to choose how their 401k plans are invested.
Some employers will offer 401k matching. When an employer matches an employee’s contributions, the employer places money into the retirement plan along with the employee. Most matching programs, however, are not equal, and the employer will only match a certain percentage of the employee’s total investments.