When you change jobs or leave the work force, one of the most important decisions you have to make is what to do with the money in your 401k plan. If you choose to cash out the funds rather than rolling them over to a self-directed IRA, you need to be aware of the costs you could incur. Those costs can include some significant tax penalties, so it pays to proceed with caution.
Step
Review the possible tax implications of your decision carefully. If you cash out your 401k prior to age 59 1/2, you could be liable for a 10 percent penalty from the IRS, in addition to the ordinary income taxes you owe on the money. That means if you withdraw $100,000, your immediate tax liability will be $10,000. Furthermore, that $100,000 will be added to your taxable income, which could push you into a higher tax bracket and cause you to owe even more money to the IRS.
Step
Log on to your 401k account if you have online access. Check your balance carefully to determine how much you have and how much you want to cash out.
Step
Contact the administrator of your 401k. The name of the 401k administrator and the firm's contact information will be listed on your 401k statement.
Step
Inform the representative you wish to cash in your 401k fund. Complete the paperwork required by the plan administrator and submit it to start the process. Be sure to indicate how you want to receive the funds, such as check or bank transfer.
Step
Keep copies of all your 401k paperwork with your tax records. You will need this documentation to determine your tax liability.
