How Do I Closeout A 401k Account?

5930041360_1cef863f31One 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.

Changing employers

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.”

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Total 21 comments are posted
  1. If I closeout my 401k, how is the cash taxed?

    Posted by : Ryan F
  2. Ryan – thanks for your question.

    Firstly, the 10% withdrawal penalty applies. Then, the value of the cash in your 401k plan is effectively added to your income for that year. Your income will increase by the 401k plan withdrawal and so you’ll pay tax at the appropriate tax brackets depending on your total income.

    Posted by : admin
  3. Ok I talked to my 401k administrater and they do not “roll over” my only real option is to cash out…. Well my question is will it effect me in the long run since I am only 22 years old??

    Posted by : kayla
  4. I am 69, do I have to pay the 10%

    Posted by : Jack G
  5. I have a 401 k I took a hardship out which I am still paying back on my 401k. does that stop me from closing out my account?

    Posted by : Alex
  6. My child is at risk to being kicked out of college, I have no other source of income to help her remain in school. Can I close my 403b plan without having to leave my job? I can no longer take a distribution.

    Posted by : Haydrenn
  7. we are on fixed in come spouse med are very high so we need the money for meds

    Posted by : darrell
  8. where can i closeout my 401k

    Posted by : stephanya
  9. I am planning on leaving the country for good. I am 34 years old. If I close my 401K what penalties will I pay?Thank you

    Posted by : Frosty
  10. i have a loan and i wont to close my 401k will they out of that loan money

    Posted by : gene
  11. I have 3 different 401K’s, one with my current employeer and 2 from previous employers that I have rolled over. I am thinking of cashing on in that is a combination of stock and cash. So the 10% comes right off the top than I would get a check for the whole, which I should keep an estimated amount to pay by next April 15, 2014? Correct? The taxes do not come right off the top because depending on what my (our-married) tax bracket is? Or do they take it off the top and you have a credit and will either pay or get a refund depending for 2013 taxes?

    Posted by : Zippy
  12. My husband is permanently disabled due to a rare form of cancer that gave him brain damage. He started receiving SSI disability in late 2012 after a year of short term/long term disability from his work. Since some of his treatments are considered experimental through my insurance, we want to rollover his 401K to our local bank in order to take out what we need to pay for treatments that my insurance will not pay for. I spoke to his former employer today and they told me to go to the bank and talk to them about the type of IRA I want, fill out the forms and mail them back to have the funds moved. Which type of IRA should I be looking at? Thank you in advance for your assistance…I greatly appreciate it…

    Posted by : Patty
  13. the company i worked for went bankrupt n i was let go. I had a maching (401)K but never roll it over or claimed it . what can i do.

    Posted by : hector
  14. Zippy – thanks for your question. With rare exceptions, all 401K withdrawals are taxable as ordinary income. An additional 10% early distribution penalty tax will be assessed if you have not reached at least age 59 ½ when you take your distribution. The money you withdraw from your 401k is added to your income for that tax year and is taxed accordingly.

    Posted by : admin
  15. Hector – thank you for your question. If your employer goes bankrupt, how your 401(k) plan will be affected depends on what type of bankruptcy is filed. In a Chapter 11 bankruptcy, your employer attempts to restructure and the 401(k) plan may be continued, although as part of the restructuring, your employer may cut back on benefits, such as matching contributions to your 401(k).

    In a Chapter 7 bankruptcy the company is basically liquidating and your 401(k) plan may be terminated. However, the Employee Retirement Income Security Act (ERISA) of 1974, ensures that the funds in 401(k) plans must be held in a trust or insurance account, separate from other company assets and protected from creditors. So the money in your 401(k) account will be safe, provided your employer has transferred your payroll deductions to the 401(k) plan account.

    If your 401(k) plan is terminated and the funds are distributed, you can avoid paying federal income tax on the earnings by rolling over the distribution into your new employer’s 401(k) plan, if the plan allows rollovers. Or you could roll over the distribution into your own IRA.

    Posted by : admin
  16. I want to cash in my 401k with an old employer to by a fifth wheel to live in as i travel for a living as a construction worker and travel from job to job and wife travels with me now so motels are off can i call this my second home and get a break on the taxes.

    Posted by : gregp
  17. “I have a open loan on my 401 -I’m told I cannot close my 401.” Can I stop making paments on the loan?

    Posted by : Ann
  18. If im terminate from my employer will i be penaltized for withdrawing my money

    Posted by : James
  19. I have always herd that 30% is the average between penalties and taxes.

    Posted by : Scott
  20. I have a 401(k)- PS with a company I still work for part-time. I started the 401(k) when I was full time. I need to cash out. When I called the company they said my plan was such that I could not cash out or roll over or get the money in any way if I still work for the company. Is this right? I have never heard of this. It is with American Funds.

    Posted by : Chris
  21. Hopefully this reaches someone, since it’s been a while it seems. Anyway, my employer is a failing company and the recently ended their 401k matching. I have only been there a year and a few months. Since the company has ceased their compensation is there still a penalty for me to close it out?

    Posted by : Dan