How to cash out a 401(k)?

A 401(k) plan is one of the retirement plans that American workers use to save for retirement. This retirement plan allows you to contribute a percentage of your salary into the retirement plan over your working years, and benefit from tax-deferred growth. If you have an emergency or other unexpected expense, you may want to know how to cash out 401(k).

If you want to cash out 401(k), first check with your employer if they allow early withdrawals before retirement. If they do, review the requirements outlined in the plan documents to know if you are eligible. You should then contact the 401(k) provider to request the necessary paperwork to cash out your 401(k). Fill out the paperwork and submit the signed paperwork to the 401(k) provider.

Are you eligible to cash out your 401(k)?

Before you cash out your 401(k), there are certain requirements you must meet to be eligible to make a withdrawal from your 401(k) plan.

Still employed

If you are an employee of the company that sponsors your 401(k), you won’t be able to cash out your 401(k) plan. In this case, you should check if your plan allows hardship withdrawals or 401(k) loans.

If the plan offers hardship withdrawals, you must have an immediate financial need such as certain medical expenses, funeral expenses, or foreclosure. If you are eligible for a hardship withdrawal, you may be allowed to take a penalty-free withdrawal but only for qualified expenses.

If the plan offers 401(k) loans, you will be allowed to borrow against your 401(k) money. You can borrow up to 50% of your vested 401(k) balance or a maximum of $50,000, whichever is less. You will be required to repay the money over time, and the loan payments and interest go back to your 401(k) account.

No longer employed

If you leave the company that sponsors your 401(k), you can cash out your 401(k) or rollover to another plan. If you want to cash out the plan, you should contact the 401(k) plan administrator and request a cash out.

The plan administrator will cash out the plan, and send you your balance via paper check or direct deposit. However, cashing out your 401(k) may have serious financial implications, and you may owe income taxes on the withdrawal and an additional 10% penalty tax if you are below age 59 ½. 

How to cash out 401(k)

The process of cashing out 401(k) may vary depending on your plan, employer, and the plan administrator. Here is the typical process of cashing out 401(k):

Contact your employer

The first step is to contact your employer or the human resources department to know if it allows early 401(k) withdrawals. Some employers may restrict withdrawals before retirement. If the company allows early withdrawals, you should review the guidelines provided in the plan documents to know if you are eligible to cash out your 401(k) plan.

Contact 401(k) provider

Once you contact the employer, the next step is to contact the 401(k) provider to request the necessary paperwork. You can contact the 401(k) provider via phone or email, and you should be able to find their contact information on your 401(k) statement. Request for the necessary paperwork to cash out your 401(k).

Provide required information and submit paperwork

Some 401(k) providers may allow the paperwork to be filled out online or via phone. However, if you receive physical paperwork, you must fill out the required information and attach any required documentation.

You may also be required to obtain necessary signatures from the plan administrator or human resource representatives to confirm that the paperwork is properly filed and that you are authorized to cash out your 401(k). You can then proceed to submit the complete paperwork via registered mail.

How long does it take to cash out a 401(k)?

Depending on your plan and who administers the plan, you can expect to receive payments within 3 to 10 days or longer after cashing out your 401(k) plan. Usually, you will need to contact the 401(k) provider and fill out the required paperwork to request a cash out either via paper check or electronically.

Some plans may limit the number of 401(k) distributions you can take to one per quarter or year, which could extend the waiting time to several months. These rules may be outlined in the plan documents.

Important considerations before cashing out 401(k)

While cashing out your 401(k) can give you a lump sum to pay for an unexpected expense, it may have various consequences that could be costly in the long run. Here are the potential implications of cashing out 401(k):

You will owe taxes

If you cash out before age 59 ½, the withdrawal will be subject to income taxes, and an additional 10% penalty tax. Additionally, withdrawals from 401(k) before age 59 ½ attract a 20% withholding tax. This means that the 401(k) plan will withhold 20% of the amount withdrawn for federal income taxes.

For example, if you cash out $5,000, the 401(k) plan will withhold $1,000, and you will only receive $4,000. The amount withheld is paid to the IRS, and you will receive a 1099R tax form showing the tax withholding. When filing your annual income taxes, you must report the withdrawal as an income; you may be eligible for a refund or owe additional taxes depending on the reported income and deductions. 

Harm your financial situation

A 401(k) plan is designed to help workers save for retirement by contributing part of their earnings to the retirement plan. Cashing out your 401(k) savings to pay for an unexpected expense would mean robbing your future retirement savings, and you won't have sufficient funds to support yourself in retirement. Additionally, cashing out 401(k) now means you will lose any future earnings or interest that the 401(k) would have earned.

You lose creditor protection

The money held in your 401(k) is protected from creditors in the event of bankruptcy, and creditors cannot seize your 401(k) balance to pay a debt. Additionally, the creditors cannot claim a legal right to the 401(k) money.

However, once you take the 401(k) money out of the retirement plan, you lose the creditor protection. If you are facing bankruptcy, creditors can seize the money in your bank or savings account to settle any debts you owe them.