Hi,

I was release from employment May 28,2008 and am still unemployed. Thinking of cashing out my 401k which is taking a beating. First, will I have to pay the additional 10% penelty for early withdrawal. Secondly, With the markets in the state they are, will it be wise for me to cash out now, I'll be 56 in December 2008.

Yes and No. You will owe the 10% penalty. Right now your losses are only on paper. If you cash out now, the losses will be come real. In addition you will also lose in penalities and taxes.

I would strongly advise you to leave it alone.

Actually there is no 10% penalty as long as you separated from service in the year you turned 55 or later. So it seems in your case you would not owe the penalty. You would owe income taxon any withdrawal, of course. However, at your age you need to plan for a retirement that will last 30 years or more. You need to stay invested to a significant extent or your funds will run out long before then, especially if you consider the effects of inflation over that time.

Whoops missed the age.

You also may want to contact you plan admin and see if they allow a 72-T distribution, oa an “equally substantial distribution.” Let's say you are still working but want to retire (let's say in this example) at the age of 55. First you quit working. Then you ROLL your 401k into an IRA. After the rollover is completed you apply for a 72(t) “equally substantial distribution”. The IRS will offer you (3) optional payout amounts. The (3) IRS optional payout methods will tell you how much the “equally
Substantial distribution” will be based on your age, the age of your beneficiary, the amount of money you have, the % rate used for the calculation and how long they expect you to live (based on IRS's mortality table). It is a neat "loop hole," and is perfectly legal, but check w/ your HR admin. First. Hope this helps...