Even if you are not yet 59 1/2 years old, if you get terminated from your job, you can cash out the money in your 401k plan. However, unless an exception applies, you have to pay not only the income taxes on the distribution, but also a 10 percent early distribution penalty.
Roll Over to Traditional IRA
If you do not face a severe financial hardship that necessitates a distribution, consider rolling over the money into a traditional IRA so that you continue to allow the money to grow in a tax-sheltered account and avoid the income taxes and early withdrawal penalty.
Cashing Out the 401K
If you do cash out the 401k plan, you need to report it properly on your income taxes and pay the appropriate penalty and taxes.
You can cash out your 401k plan at your former employer by completing the required distribution forms to tell your employer where to deposit the money. After the year ends, your employer will send you Internal Revenue Service Form 1099-R documenting the amount you cashed out and the amount withheld for your anticipated federal income taxes.
Also complete IRS Form 5329 unless you are 59 1/2 years old. If you are 59 1/2 years old, you do not owe the early withdrawal penalty and don't need to fill out the form. Otherwise, on Form 5329, calculate your 10 percent early withdrawal penalty. If an exception applies in your situation so you do not need to pay the penalty, document it on the form. Exceptions include if you were at least 55 years old when you were terminated or if you have a permanent disability.
Report the penalty from Form 5329 of your Form 1040 income tax return. When you calculate your total tax liability, this amount will be included in what you owe to the government.
When you file taxes, report your 401k plan distribution on your Form 1040 tax return. This amount adds to your taxable income for the year. The early withdrawal penalty is in addition to, and does not replace, the income taxes on the distribution. Add the amount of money withheld from your 401k plan cash out to any other federal income tax withholding and report the total to the IRS. You can find the federal income taxes withheld on your Form 1099-R, which you will receive from your former employer along with other tax forms. You can find federal income tax withholding for your job on your Form W-2.