How to Liquidate a 401(k) After Quitting

The process of liquidating a 401(k) is simple and straightforward. The larger issue with cashing out a retirement account early is the penalties that are associated with doing so. If a person has not reached the age of 59 1/2, there is an early withdrawal penalty of 10 percent on top of the additional income tax that will have to be paid on the distribution from the 401(k). Cashing out a 401(k) should be thought through carefully as replacing funds back into a 401(k) after new employment is obtained can take a considerable amount of time and can cause potential problems with having enough money saved for retirement.

Instructions

1. Review the 401(k) plan's policy on cashing out funds. Often the employer who sponsored the retirement account is required to withhold a portion of the funds for taxes and penalties. If the employer does not withhold any funds for penalties or taxes, you will need to retain a portion of the funds for the 10 percent penalty and for the increase in income tax required.

2. Contact the 401(k) plan administrator and request to cash out the account. The plan administrator may have an application that must be filled out, or it might require proof that employment is terminated.

3. Provide a mailing address or deposit account information where the 401(k) will be sent to.

Tips & Warnings

• If the 10 percent early withdrawal penalty is not paid, the penalties imposed can increase substantially.

References

• MoneyNing: What to Do With My 401(k) After I Quit
• Merriman; What Happens to Your 401(k) When You Leave Your Job?; Cheryl Curran; September 2009