Cashing out a 401k from a former employer is not a difficult task. In most cases, you contact the plan administrator for the appropriate paper work, fill it out, send it to the financial institution that manages the 401k, and wait for the check to come in the mail or for the electronic transfer.
Handling a Previous 401k
You usually have a few options when it comes to handling a 401k from a former employer. These include leaving the 401k where it is, rolling it into a taxable or nontaxable Individual Retirement Account or transferring it to a 401k with your current employer and cashing it out. Of all your options, cashing out will cost you the most now and in the future. You will have to pay income taxes on the withdrawal along with a 10 percent early withdrawal penalty. You'll also lose the tax benefits offered by the 401k as a qualified retirement plan.
If you decide to do a lump-sum payout of your entire 401k balance, contact your plan administrator for the distribution procedures and paperwork. Most provide a toll-free number to contact a distribution specialist to help you with the process. Keep in mind that the plan is required to withhold 20 percent of the distribution for taxes, and you'll pay a 10 percent early withdrawal penalty when you file your taxes for the year. In other words, for every $1,000 you distribute, $200 is withheld for taxes and another $100 penalty is due when you file taxes.
Partial Cash Out
If you only need some of the cash in the account, you can withdraw that amount and leave the rest in the 401k or do a direct rollover to an IRA with the remaining funds. This allows you to avoid the tax withholding and early withdrawal penalty on the money you leave in the 401k or roll to an IRA. It also keeps that part of your savings growing tax-deferred, meaning you pay no taxes until distributing the money during retirement.
Rolling Over Your 401k
If you roll over your 401k, you can do it directly from your 401k plan to your new IRA account. This way no taxes are withheld. Set up an IRA with the financial institution of your choice, and its representative will help you contact the institution that manages your 401k plan to request a direct rollover. When you do the rollover, you can choose to have a percentage of the account distributed to you in the form of a check, but this part is subject to tax and penalties. You can also withdraw cash from your IRA after you roll over funds, but you'll pay taxes and the 10 percent penalty until you reach the age of 59 and six months.
You can use the 60-day rule to access short-term cash, but you'll have to get the cash back into your new IRA within 60 days of the withdrawal to avoid penalties and taxes. Instead of having the 401k plan send the funds directly to your new account, you can request a check and deposit the funds to the new IRA within the 60-day period. It is still considered a nontaxable rollover if the same amount you withdraw is deposited within the 60-day time frame. Otherwise, you pay ordinary income tax and the early withdrawal penalty on any cash not put in the IRA. You can only use the 60-day rule one time per year.