Do You Have to Roll Over Your 401k Before You Can Cash It Out?
If you regularly invest in your 401k account, you can build a solid balance over time, especially if you leave the money in the account to grow tax free. Even with the best intentions to let your nest-egg grow, you may have reasons to withdraw from your account, or to cash it out. You can do this in certain instances, and you don't have to roll over the money into an IRA first.
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At Retirement
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A good time to begin withdrawing from your 401k account is when you decide to retire. You generally must be 59 1/2 years old to begin withdrawing from your 401k without incurring the 10 percent penalty. However, if you are age 55 or older, and you leave your job permanently, you can withdraw from your 401k without the 10 percent penalty for early withdrawal. Most employer plans will let you keep the money in the 401k when you retire and withdraw funds regularly.
Staying Employed
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If you are still employed with the company that offered the 401k, you cannot roll the account into an IRA. You need to keep the 401k account with your employer's plan. You cannot withdraw from the plan if you are still employed unless you are allowed to take a hardship withdrawal. Your company does not have to offer these types of withdrawals, but if they do, it will generally be for sickness or financial problems that may cause you to lose your home. Depending on the type of withdrawal, you may owe the 10 percent tax penalty in addition to any taxes at your income tax rate.
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Leaving Your Job
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When you leave your job, you are free to cash out your 401k if you like. This may not be the best financial decision, as the tax deferred money has built up over time, and you can not put the money back into the account tax free. Cashing out the plan also means that you could have much less money available at retirement. If you choose to cash out your 401k after you leave employment, you do not need to roll the money into an IRA, as your plan trustee will just send you a check.
Options to Roll Over
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When you leave your job for any reason, you do have the option to roll the 401k directly into an IRA account. You will want to arrange a trustee-to-trustee transfer; otherwise, the trustee of your plan will withhold 20 percent of the balance to pay taxes. If you do not put this 20 percent back into an IRA within 60 days, it is considered a withdrawal, and you owe taxes and the 10 percent penalty on this amount. Many people prefer to roll their 401k account into an IRA to give them full control over the investment of the money.
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