How to Cash in 401k Before Retirement
A 401k plan is a retirement savings vehicle that allows employees to make contributions to an employer-run account that is given special tax benefits. Though the money in the account belongs to you, unlike an IRA, you cannot simply withdraw money whenever you want and pay a penalty on non-qualified distributions. Even if you qualify for a hardship distribution, you must still pay taxes and penalties on the withdrawal, so cashing in your 401k before retirement should be a last resort.
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Instructions
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Determine whether you qualify for a hardship withdrawal of your 401k funds. The specifics of what constitutes a hardship vary from plan to plan, so if you are unsure, contact your 401k plan provider to find out what qualifies as a "hardship" in your case. In most cases you need to show that you have a very high financial need that cannot be met by any other source. These needs can include making housing payments to avoid eviction, extremely high medical bills, funeral expenses and college tuition.
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Contact your 401k provider to inform them of your need to take a hardship withdrawal and the amount that you will be withdrawing. You will usually need to present documentation that you have no other assets, such as bank or brokerage accounts, that you can use to pay these expenses.
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Report the amount of the distribution on your form 1040 tax return as pension and annuity income. For tax returns for the 2009 year, this is line 16a and 16b.
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Complete form 5329 to determine the amount of the penalty you will owe. The IRS charges a 10-percent penalty in addition to any income tax you owe for early withdrawals from your 401k plan.
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Write the amount of the penalty you owe, from form 5329, onto line 58 of your form 1040 tax return.
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Tips & Warnings
After you take a hardship withdrawal, you cannot put money back into your 401k plan for half a year.
