Thinking About Cashing Out Your 401(k)? Read This First..

Cashing Out During An Economic Crash Out? Let’s Think This Through..

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Hey Hey, Funders!

It’s been a crazy year, hasn’t it? While I know we’re just getting into this month - the last couple of weeks have felt like a year, right?!

Back in 2010, during the last recession, I cashed out my own 401(k), I talked about how it was the baseline of who I am today when it comes to personal finance and financial planning. As small as it was, I panicked. I didn’t have an emergency fund, and fear took over. Looking back, I wish I had other strategies in place instead of pulling money out. We’re going to yap/talk about that today.

Lately, I’ve been seeing more posts and tweets about people wanting to do the same—cashing out their 401(k), 403(b), or IRA. I get it—between market drops, inflation, and policy shifts, folks are scared their retirement savings will shrink before their eyes. With so much uncertainty, the knee-jerk reaction is to pull everything out before things get worse.

But here’s the thing—cashing out could hurt you more than riding the wave. Let’s money how the economic crash out (unprecedented things happening over and over) could hurt your cash out.

I get that it's loud outside right now, but we have to focus, Fam.

What’s Going On In the Economy? An Economic Crash Out.

While I know you’re protecting your piece, let’s look at what’s going on/happened. There’s a lot happening right now that’s making people uneasy:

Market volatility tied to economic policies and global uncertainty
Tariffs and trade tensions that could drive up costs and impact investments
Inflation that’s still stretching wallets
Geopolitical risks, including potential conflicts and war threats, that could shake the stock market
Concerns about job security and future retirement stability
Federal Reserve interest rate moves that could impact borrowing costs and investment returns
Corporate layoffs and hiring freezes affecting long-term financial confidence

With most retirement accounts invested in the stock market, any dip can make your balance look scary. That’s why so many people feel like their safest bet is to take their money and run. But before you make a move, let’s break down what happens when you cash out early.

The Tax & Penalty Trap

Pulling money from your 401(k) before age 59½ (and a day) isn’t just withdrawing—it’s triggering taxes and penalties:

10% early withdrawal penalty (unless you qualify for an exception)
Income tax hit—that money gets added to your taxable income for the year, potentially pushing you into a higher tax bracket
Lost future growth—once you pull that money out, it’s no longer working for you in the market

So instead of keeping more money in your pocket, you could actually lose more in the long run.

Rebalancing > Retreating

Rather than cashing out, consider adjusting how your money is invested. Your 401(k) isn’t just a “set it and forget it” account—it’s something you should tweak based on the economy, your goals, and your risk tolerance. Instead of pulling out completely, think about moving your allocations into funds that have historically performed well during downturns (when the market drops).

Steps To Rebalance & Adjust Allocations

Check your current investment mix – Log into your 401(k) account and see where your money is allocated. Are you too heavily invested in stocks? Consider adding more bonds or stable funds.
Look at historical performance – Some funds perform better during market downturns. Look at funds with strong past performance in volatile times.
Reduce high-risk investments if needed – If the market swings make you anxious, shift some of your investments to lower-risk options while still staying invested.
Consider sector diversification – Some industries, like healthcare and consumer staples, tend to hold up better in economic uncertainty.
Use auto-rebalancing if available – Many 401(k) plans offer this feature, which keeps your investments aligned without constant monitoring.
Increase your cash reserves – Consider shifting a small portion into a money market or stable value fund within your 401(k) for liquidity without exiting completely.
Maximize employer match – If your employer offers a match, make sure you’re contributing enough to get it—it’s free money that helps offset losses.

HR! Yes, Call HR And Your Retirement Plan Custodian/Provider Before Your Cash Out

Do you know that if you have a 401K, you pay a service fee? That fee more than likely allows you to tap in with the servicers (some will call it custodian) before you cash out. Before making any changes, call your HR department or retirement plan provider and ask:

What are my current contribution and allocation percentages?
How would my allocation mix stand up to 20% drops in the market?
What are some indicators I should be looking out for in case of the worst?
How does the prospectus look for each of these funds, can you walk me through it? (Prospectus is like a report card for that fund)
What investment options do I have, and are there lower-risk funds available?
Does my plan offer auto-rebalancing to adjust for market changes?
If I take a 401(k) loan, what are the repayment terms and impact on my future savings?
Are there penalties or restrictions for temporarily changing my contribution amount?

Nadia — Financial Planner 💸

It’s getting LOUD economically. Layoffs, inflation, tariffs—plus whatever fresh chaos is next. The economy is crashing out, and people are feeling it. So, it makes sense that folks are thinking about cashing out their 401(k)s. I get it. But here’s what happens when you pull your money too soon: - Taxes & penalties will take a chunk before you even touch it. - You miss out on future growth—what goes down can come back up. - It’s harder to rebuild later—once that money is out, it’s tough to replace. Instead of making a panic move, let’s PLAN your first. I break it all down in my latest newsletter so you can move with strategy, not stress/fear. How are you feeling right now — about everything, not just your money?! Dassit. #personalfinance #401k #RetirementPlanning #economy #fy #financialliteracy #moneytips #stockstobuy #inflation

♬ Monkeys Spinning Monkeys - Kevin MacLeod & Kevin The Monkey

Make it a habit to check in quarterly with your HR or retirement plan provider. Market conditions change, and you want to ensure your investment strategy is still aligned with your long-term goals.

Thinking About Stopping Contributions Or Changing Your Allocation?

If you’re considering pausing your 401(k) contributions or lowering your percentage, make sure you have a game plan. First, ensure you have an emergency fund or sinking fund set up—this acts as your financial buffer, so you’re not relying on your retirement savings for unexpected expenses. If you do decide to lower contributions, consider moving that extra cash into a high-yield savings account (HYSA) so it’s still growing and accessible when needed. Even would tell you to consider a CD if you have the cash on hand.

Also, don’t completely cut yourself off from retirement savings. Try to at least contribute enough to match your employer’s contribution—that’s free money you don’t want to leave on the table. Adjusting your strategy is fine, but don’t sabotage your future wealth for short-term relief.

Need Cash? Consider These Alternatives First

If you’re feeling strapped for cash, there are options to explore before touching your 401(k):

- 401(k) Loan – Some plans allow you to borrow against your balance without triggering taxes or penalties, as long as you repay it on time. This is legit the last line of defense.

- HELOC or Personal Loan – If you own a home, a Home Equity Line of Credit (HELOC) might be a more cost-effective option. Personal loans from banks or credit unions may also be better than withdrawing retirement funds. PLEASE look at the terms and conditions to make sure it align with your money moves now and later.

- Side Hustles or Gig Work – If you need short-term cash, picking up a temporary side job could provide relief without damaging your future wealth.

- Tapping Other Savings – A high-yield savings account, brokerage account, or even a Roth IRA (contributions only) might offer liquidity without penalties.

- Cutting Expenses or Negotiating Bills – Review your budget and see if you can free up funds by reducing discretionary spending, negotiating bills, or pausing non-essential subscriptions. We talked about negotiating bills with money scripts here.

Before making any financial moves, consider talking to a professional who can help you weigh the pros and cons based on your specific situation.

Before You Cash Out -

I understand the fear. No one wants to see their hard-earned money shrink. But making decisions out of panic often leads to bigger losses. Instead of cashing out, look at how you can protect and grow what you have. The market moves in cycles, and the best way to come out ahead is to play the long game.

What I’m telling you to do - is think it through and then determine what works best for you. I don’t want you to lose gains by emptying your 401K or IRA completely. But I do want you to prepare on how to protect it better during this economic crash out.

Stay informed, stay strategic, and don’t let fear make financial decisions for you. Keep your head and your wallet on swivel (stay locked in).

Got questions? Hit reply and let’s talk about it! Need help figuring out your next steps? Book a session with me here.