401(k) cash out vs rollover: what cashing out really costs
When someone leaves a job, an old 401(k) can usually be left where it is, rolled into an IRA or a new employer plan, or cashed out. Cashing out is the one option that triggers tax right away, and for many people under 59 and a half it adds a penalty as well. The 401(k) Rollover Decoder shows what a cash-out leaves in hand, what the same balance would have grown to if rolled over, and, in a second calculator, what a difference in fees costs over the years.
The decision it answers
The tool answers two related questions. First: if I cash this balance out now, how much do I actually keep after income tax and any early-withdrawal penalty, and what is that worth against leaving it invested? Second: if I roll it over, how much does the difference between the old plan's expense ratio and a lower-cost option add up to over time?
How the tool computes it
The cash-out math
calcCashout() applies a 10% penalty when age is under 59.5 and the Rule of 55 box is not checked. Income tax is the balance times your federal plus state rate, a single flat rate. It shows the 20% mandatory withholding separately as a prepayment of that tax, not an extra cost. What you keep is the balance minus income tax minus penalty.
Lost growth
The rolled-over value is the full balance grown at your return for the years to retirement. The true cost of cashing out is that future value minus the cash kept today. The tool also shows what the kept cash would grow to if every dollar were reinvested, to isolate the cost of the tax and penalty coming out first.
Fee drag
calcFees() grows the same balance at the gross return minus each expense ratio for the same number of years. The difference between the two ending values is the cost of the higher fee. The tool points to the plan's 404(a)(5) fee disclosure as the place to find the real figure.
Worked example
These inputs are hypothetical, not a real person or account. The results were produced by running the tool's own calculation code on them.
- 401(k) balance: $60,000
- Age: 38 (Rule of 55 not applicable)
- Federal and state rates used: 22% and 5%
- Years to retirement and return: 27 years at 6%
- Fee comparison: 0.85% old plan vs 0.10% alternative
- The plan withholds 20%, $12,000, so $48,000 arrives at first. That withholding is a prepayment, not an extra charge.
- Income tax at a combined 27% is $16,200, and because age 38 is under 59 and a half, the 10% penalty adds $6,000.
- What is kept is $60,000 minus $16,200 minus $6,000, or $37,800. That is 37% of the balance gone up front, $22,200 in tax and penalty.
- Rolled over and left at 6% for 27 years, the same $60,000 grows to $289,341. The tool reports the true cost of cashing out as $251,541.
- Even if all $37,800 were reinvested at the same 6%, it would grow to $182,285, still $107,056 behind.
- On the fee tab, the old plan at 0.85% ends at $232,810 and the 0.10% option at $282,060, a fee difference of $49,250 over 27 years.
In this hypothetical, cashing out keeps $37,800 today, against $289,341 projected if rolled over; the fee gap alone is $49,250.
Assumptions and limits
- One flat marginal rate is applied to the whole withdrawal. A large cash-out can push part of it into a higher bracket, which the tool states but does not calculate.
- Returns are a single level rate every year; real returns vary and can be negative.
- The Rule of 55 is a checkbox you set. The tool does not verify the separation year, and its help text notes age 50 for qualified public-safety workers.
- Net unrealized appreciation (NUA) on company stock is flagged with a warning but not modeled. Roth and after-tax balances are not handled.
- Fee drag subtracts the expense ratio from the gross return; plan administration fees beyond the fund expense ratio are only mentioned.
- The 10% additional tax on distributions before 59 and a half and the 20% mandatory withholding on eligible rollover distributions paid to the participant are long-standing federal rules; exceptions beyond the Rule of 55 are not modeled.
Sources for the rules on this page
Run it with your own numbers
The 401(k) Rollover Decoder is free, but it needs a free Obsidian Metrics account: signed-out visitors are sent to sign in first.
Frequently asked
How much tax is due when cashing out a 401(k)?
A pretax cash-out is generally taxed as ordinary income, and under 59 and a half a 10% additional tax usually applies unless an exception such as the Rule of 55 covers it. The tool applies your federal plus state rate as one flat rate and adds the 10% penalty when it applies.
Is the 20% withholding the same as the tax owed?
No. The plan withholds 20% of an eligible distribution paid to you, but that is a prepayment credited at filing. The actual tax can be higher or lower. The tool shows the withholding as cash that does not arrive up front, and counts the tax owed separately.
What is the Rule of 55?
It lets someone who leaves an employer in or after the year they turn 55 take withdrawals from that employer's plan without the 10% penalty. Income tax still applies. In the tool it is a checkbox that removes the penalty; it does not verify eligibility.
How does the fee drag calculator work?
It grows the same balance at the gross return minus each expense ratio for the same number of years and reports the gap between the two ending values. In the worked example that gap is $49,250 over 27 years.
Does the tool decide between an IRA and a new employer plan?
No. It lays out the four options in plain language and prices the cash-out and fee scenarios. You can build a decision summary and copy or print it to bring to an advisor.
More decision tools: Roth Conversion Calculator, Balance-Transfer Calculator, PMI Removal Decoder, Pension: Lump-Sum vs Annuity.
Talk it through
The free Obsidian Metrics community on Skool is where members discuss decisions like this one and the frameworks behind them. It is education, not personal advice.