How to Cash Out a 401(k) Instead of Rolling Over

You might avoid a penalty if you use your 401(k) to stop foreclosure.

You might avoid a penalty if you use your 401(k) to stop foreclosure.

When you leave a job behind, it’s often a bittersweet experience. You’re excited to take on new responsibilities and new challenges, or you may be thrilled to leave behind an unhappy work environment. One often-neglected aspect of leaving an employer is deciding what to do about your retirement plan. Although you may be able to leave your funds in your retirement account even if you’ve moved on, you may want to explore other options.

Cashing out a 401(k) from a previous employer may be tempting. This can be an expensive option, though, when it comes to tax time. There are some exceptions that allow you to withdraw money from a 401(k) without an early withdrawal penalty. You can also roll over the 401(k), which means moving your funds into another qualified retirement plan. If your heart is set on getting cold, hard cash, though, cashing out your 401(k) is a relatively simple process.

How to Cash Out a 401(k)

The first step to cashing out a 401(k) after leaving a job is to contact your plan’s administrator. You can often find the contact information on your 401(k) plan statements, but if you don’t have one handy, contact your former employer’s human resources department.

Let the plan administrator know that you would like to make a withdrawal because you have ended your employment. Your plan administrator will provide you with a form to complete, which your spouse may have to sign as well depending on the plan’s rules.

When you receive the form, review it carefully and fill it out completely. You will typically need to provide personal identification information such as a Social Security number. You will need to choose your reason for taking a distribution and how much you would like withheld in taxes. Distributions from your 401(k) are considered taxable income, so you should keep in mind that you will owe both state and federal taxes on your distribution.

Your plan will report your distribution to the IRS and your state, so if you don’t have taxes withheld when you withdraw your funds, the IRS and your state’s tax authority will know and will expect you to pay by your income tax due date. You will also receive a form to include with your tax return called a 1099-R.

Sign, date and return your form to your plan administrator. Once they receive the form, it will take some time for them to process it and cut your check. They will mail it to the address you specified on your withdrawal form.

Consequences of Cashing Out a 401(k)

If you withdraw funds from your 401(k) before age 59 ½, you may be subject to a 401(k) early withdrawal penalty. This is an additional 10 percent tax on the funds you withdrew. For example, if you received a $10,000 distribution and had 20 percent withheld for federal taxes and 10 percent withheld for state taxes, your distribution is already down to $7,000. If you are hit with the early withdrawal penalty, you will owe another $1,000 if you didn’t have it withheld when you made your distribution.

Rollovers to another qualified plan, like a 401(k) with your new employer or a traditional individual retirement account, are not considered taxable income, and you will not owe income taxes or an early withdrawal penalty. Rollovers have to go directly from one plan to another, though. If you receive the money and then deposit it into an IRA, you will still owe income taxes.

Exceptions to the 401(k) Early Withdrawal Penalty

In some circumstances, you can make a 401(k) early withdrawal without having to pay the early withdrawal penalty. You will still owe state and federal income taxes on the distribution, though. For example, if you left your employer within a year of turning age 55 or older, you can make a penalty-free withdrawal. You can also make penalty-free withdrawals if you are totally and permanently disabled, in the event of certain disasters, for medical bills up to the maximum medical expense deduction on your income taxes or for a qualified domestic relations order.

You can also avoid the penalty by taking your withdrawal as equal periodic payments. These payments are paid at least once per year for at least five years or until you are age 59 ½ (whichever is later) and are based on your life expectancy. There are several options for calculating your equal periodic payments. You can find calculators online or discuss the options with a tax professional or accountant to determine the correct amount for your needs.


  • You might be able to cash out your 401(k) even if you are still working for the employer sponsoring your account if you experience a significant hardship, such as foreclosure.
  • You may cash out the 401(k) without the extra 10 percent penalty under certain circumstances, such as your complete and permanent disability.
  • Your plan might allow loans against 401(k) accounts. If this option is available, consider taking a loan out against your account instead of cashing out.


  • Because the 401(k) cash out money is considered income for tax purposes, having that amount added to your other income could raise your personal income tax rate.

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About the Author

Melinda Hill Sineriz is a freelance writer with over a decade of experience. Her work has appeared on Pocket Sense and Sapling. She specializes in business, personal finance, and career writing. She has worked in insurance sales and financial planning, helping families to manage their money and prepare for the future. Learn more about her and her work at thatmelinda.com.

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