What Is the Easiest Way to Cash Out a 401(k)?
A 401(k) plan is an employer-sponsored retirement plan designed for long-term savings. While retirement plans can be confusing, with all of their restrictions on contributions, distributions and transfers, the money in your account belongs to you, and as long as you are aware of the penalties and taxes associated with your distribution, you are free to withdraw the money whenever you like. Numerous strategies are available to access the money in your 401(k), and you should review all the options, or get the assistance of a financial or tax adviser, before you choose one.
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Instructions
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If you genuinely need immediate funds and have no other options, simply withdraw all the available cash in your 401(k). This is the easiest way to cash out. The problem with this method, in addition to the fact that you are eliminating all of your retirement savings, is that your withdrawal from your 401(k) plan is fully taxable at ordinary income rates. Additionally, if you are under the age of 59-1/2, the Internal Revenue Service (IRS) will assess an additional 10 percent penalty tax on your withdrawal. Thus, you may be left with as little as half the value in your 401(k) plan when you withdraw it.
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Borrow from your 401(k). Although the details vary from plan to plan, generally you are allowed to borrow up to half the value of your 401(k) at any time, and you repay the interest to yourself. Further, as a 401(k) loan is not considered a distribution, you are not taxed on the amount you withdraw. Thus, if you take a loan, you can temporarily use half the value of your account and have the remaining half still invested for you.
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Roll over your 401(k) into another qualified retirement plan, such as an Individual Retirement Account (IRA) if you want to cash out because you are unhappy with the performance of the investments rather than having an immediate need for the funds. While you will not receive employer contributions into your IRA as you likely did with your 401(k), you generally have broader investment capabilities with an IRA, and you can roll your 401(k) assets into an IRA tax- and penalty-free.
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Speak to your 401(k) administrator and complete the appropriate paperwork for whatever course of action you choose. If you are making a straight withdrawal, your administrator will ask if you want any taxes withheld, and how you want to receive the funds, such as via check or electronic transfer. For rollovers, provide information on where the funds are going, including the name of the receiving firm and your IRA account number. If you are taking a loan, agree on the terms of the loan with the administrator, such as the amount you wish to borrow, the length of the loan and the monthly payments.
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