After you leave employment with a company, you may want to access the funds you accumulated in your 401k plan. No matter your age, the Internal Revenue Service (IRS) rules allow you to remove money from a 401k plan at a former company. However, that does not make it a qualified distribution unless you are 59 1/2 years old. This means not only will you owe income taxes on the cash out, but you will also owe an early withdrawal penalty.
Contact the 401k plan administer at your former employer to cash out your 401k plan. You will need to complete a withdrawal request form telling the former employer how to distribute the money, such as a check to you or a transfer into your checking account. If you do not roll over the funds within 60 days, the money is permanently distributed from the account and, if you are under 59 1/2 years old, will owe a 10 percent early withdrawal penalty on top of income taxes.
Complete Form 5329 to calculate your early withdrawal penalty on your 401k cash-out from your former employer if you are under 59 1/2 years old at the time you take the money out. If you have an exception, such as being 55 when you retired or medical expenses in excess of 7.5 percent of your adjusted gross income, you avoid the penalty on that portion of the distribution. If no exception applies, or if your exception does not cover the entire cash out, you have to pay a 10 percent early withdrawal penalty.
File your income taxes with Form 1040. On line 16b, report the amount of the cash out as a taxable pension distribution. On line 58, report the early withdrawal penalty, if any. On line 61, add the amount of federal withholding, if any, to your other income tax withholding.
Items you will need
- IRS Form 5329
- IRS Form 1040