How to Cash Out a 401k Instead of Rolling Over
In some cases, it is prudent to take out a loan from your 401k plan. It is better to do this than to liquidate your plan altogether. But there are some situations that may require this drastic course of action, such as a medical emergency. The process for liquidating your plan is relatively simple.
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Instructions
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Contact your plan administrator or human resources department and inform them that you intend to liquidate your plan. They will either send you the distribution forms or direct you to the link on their website where you can download these forms.
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Complete the forms carefully, specifying that you want to take a total distribution. Be sure to spell your name correctly and enter your Social Security number correctly. You will probably have to enter sell orders for all of your plan holdings and then have the proceeds transferred to the cash fund in the plan. Then the administrators will send you a check for the balance.
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Return the forms to your plan administrator or HR department by mail, fax or email, whichever is required. It will probably take a few days for them to process your request and transact your sell orders. They should be able to give you at least a pretty good idea of when you will get your money.
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Specify whether you want taxes withheld from your distribution or not. Remember that the entire distribution will be taxed as ordinary income, plus an additional 10 percent early withdrawal penalty. You can easily lose a third of your plan balance to the IRS from this distribution, which is why it is so strongly discouraged. The additional income that you realize can also easily land you in a higher tax bracket, thus increasing the rate of taxation of much of your other income.
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Remember to change your contributions if you do not intend to make further contributions into the plan. Let your HR department know whether you intend to make further contributions into your plan or not. If not, you will need to complete further paperwork that reduces your contribution rate to 0.
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Tips & Warnings
Be aware that some companies will not allow you to cash in your 401k plan unless you leave the company.
