One of the most common questions that hard-up Americans ask is: “How do I closeout a 401k account?” If your savings are diminished, your 401k may be your only source of cash. Or, perhaps you are leaving your employer and you want to know what to do with your retirement savings?
Whatever your situation, our guide explains how you closeout a 401k account. Keep reading to learn more.
You have several options regarding your 401k plan when you change employers. You can choose to rollover your 401k account to your new employer’s 401k by telling your plan administrator. You will also have to complete some paperwork.
You can also elect to leave your 401k plan with your former employer, although this is not always recommended.
Your third option is to rollover your 401k into a new retirement savings plan such as an IRA (see below).
Finally, you can choose to closeout your 401k plan and withdraw the money. However, there may be taxes and penalties for this as we will see shortly.
Rolling your 401k into a new savings plan
As of 2011, the IRS gives you 60 days to make a choice as to what you will do with the funds from your 401k plan before you start to incur taxes and penalties. You therefore have to make a relatively quick decision.
If you close out your 401k account and immediately roll it over to a new retirement account (such as an IRA) in the allotted time frame, you will incur no fees on your funds. Our guide to rolling over your 401k plan will help.
Closing a 401k account and withdrawing the cash
When you closeout your 401k plan you will generally pay penalties and taxes on the cash you withdraw.
However, for 401k plans the IRS will allow a penalty-free withdrawal if you fall into one or more of the following categories:
- Withdrawals paid to the IRS to pay a levy on the 401k plan itself
- Withdrawals made because you have been permanently disabled
- Withdrawals made to your estate after your death
- Withdrawals where your medical expenses exceed 7.5 per cent of your adjusted gross income
Other withdrawals will generally be subject to taxes and penalties if you are under the age of 59 ½.
Firstly, you will pay a 10% withdrawal penalty for closing out your 401k plan early (in this case ‘early’ means before the age of 59 ½).
When you withdraw funds from your 401k plan you will also often find that the withdrawal is taxable.
David Wray, president of the Profit Sharing/401(k) Council of America, has warned that people making withdrawals from a 401k plan could pay a penalty of up to 40 per cent, once state and federal taxes are added to the 10 per cent penalty.
He said: “People take a very significant hit when they take a hardship withdrawal.”
Beth McHugh, vice president of market insights for Fidelity agrees. She told CNN: “People should be prepared, because when it comes time to do their tax filing, that money is taxed as income. They need to make sure they keep some of that money aside so they can use it to pay their taxes instead of spending it.”