How to Cash Out a 401(k)
Section 401(k) of the Internal Revenue Service (IRS) tax code sets forth the provisions for tax-deferred retirement savings plans offered by employers to employees. The 401(k) is a powerful savings tool for individuals who have plans for retirement beyond continuing to work. When financial times are hard, people look to their 401(k) to cover expenses they'd otherwise have to leave unpaid. While a controversial issue among financial professionals, you can access your retirement funds in a number of ways, including pulling all the cash out of your 401(k).
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Things You'll Need
- Recent 401(k) statement
- Original 401(k) plan paperwork
- 401(k) account number
Instructions
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1
Review your current 401(k) statement. This document provides your current balance, earnings information and ways to contact the company holding your funds.
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Determine if you have enough to cash out of your 401(k). Although you can take any amount, smaller sums may not be adequate for your needs once you subtract tax withholding and the 10 percent IRS penalty for withdrawing retirement funds before you are 59½ years old.
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Read your contract and disclosures. Your original paperwork from the time you set up the 401(k) will have a wealth of information. This has cash-out procedures and any company-specific rules. If there is a specific phone number or address for withdrawals different from the contact information on your statement, you'll find it here.
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Find out if your withdrawal qualifies for special tax treatment from the IRS. The tax code stipulates exceptions to the 10 percent penalty in cases of hardship, like paying for qualified education expenses or stopping a home foreclosure. Be sure to let your 401(k) administrator know if any of the special circumstances apply to you.
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Contact your 401(k) administrator. Use your company's procedures to cash out 401(k) accounts. Ask for the correct forms and detailed procedures to complete the paperwork. A mistake as simple as forgetting your 401(k) account number or using the wrong color ink to complete the forms can invalidate the form or delay processing.
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Return the paperwork to the 401(k) company. Once everything is in order, you'll receive a check or deposit notification of the amount you have withdrawn.
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Tips & Warnings
If your employer allows it, consider taking a 401(k) loan instead of cashing it out. You'll still forfeit the potential gains by leaving the account intact, but you avoid the early withdrawal penalty from the IRS. Depending on your employer, you may be paying loan interest back to your 401(k) account instead of the company. You can also roll the funds over into an Individual Retirement Account (IRA) to avoid taxes and penalties instead of cashing out your 401(k) from a previous employer. Even if you've already cashed out, you can avoid penalty by depositing the funds into your IRA within 60 calendar days from withdrawal.
Remember that not every employer allows for a total 401(k) cash out while you are a current employee, especially if your account includes company matching funds. Review your plan's rules before counting on access to the funds.
Always research the tax ramifications of cashing out your 401(k) account. Taxes and penalties can eat up a large percentage of the funds before you ever have benefit of the money. Never assume you'll have quick access to the funds.
