To cash out a 401(k), you generally follow these steps, but be aware of tax implications and possible penalties:
How to Cash Out a 401(k)
- Contact your plan administrator: Reach out to the company managing your 401(k) to request a distribution form or log into your account online to initiate a withdrawal
- Fill out required forms: Complete the necessary paperwork to specify how much you want to withdraw and how you want to receive the funds (e.g., check, direct deposit)
- Consider timing and age:
- If you are 59½ or older , you can withdraw without a 10% early withdrawal penalty, but you will owe income taxes on the amount withdrawn (unless it is a Roth 401(k) with qualified distributions)
* If you are **under 59½** , early withdrawals usually incur a 10% penalty plus income taxes, unless you qualify for exceptions such as leaving your job after age 55, disability, or certain hardships
- Understand tax withholding: For early withdrawals, your employer typically withholds 20% for federal taxes upfront
. The withdrawn amount counts as taxable income for the year
- Consider alternatives to cashing out:
- You may take a 401(k) loan if your plan allows, borrowing up to 50% of your vested balance or $50,000, whichever is less, without immediate tax consequences, but you must repay it with interest
* You can also do a **rollover** to another 401(k) or an IRA to avoid taxes and penalties, especially when changing jobs
Important Considerations
- Cashing out reduces your retirement savings and potential compound growth
- Required minimum distributions (RMDs) must begin by age 73 if you keep money in the plan
- If you withdraw early, the 10% penalty and taxes can significantly reduce your net amount
In summary, to cash out your 401(k), contact your plan administrator, complete the withdrawal forms, and be prepared to pay income taxes and possibly a 10% penalty if under 59½, unless you qualify for an exception. Consider loans or rollovers as alternatives to preserve your retirement savings and minimize taxes
