Whether you're combining 401k accounts or just need to close the account because you need the money, it's relatively simple to terminate your 401k. After all, it's your money and you should be able to access it at any time. However, there are potential significant tax consequences for closing the account early.
Rolling the Money Over
When you leave a company, but want to keep the money in your 401k as a tax-deferred retirement investment, you have the option to roll the money over into a new 401k, or an IRA. To do this, tell the account custodian that you want to initiate a rollover. The custodian must then directly transfer the money to your new account, or cut you a check in the name of the new custodian, usually with a note that the money is "for the benefit of" you. Once you do this, the initial account is closed.
Taking a Lump Sum
You can also terminate the account, taking a lump sum check for the full amount in the account. To do this, tell the custodian that you want to terminate the account. As the custodian writes the check, it will also withhold 20 percent of the full amount to pay for taxes, and another 10 percent of the amount if you are closing your account before you reach age 59 1/2.
When you leave a company and have less than a certain amount -- usually $5,000 -- within your 401k account, the custodian may force you to terminate the account. In this case, you'll be given notification about the custodian's intent and the option to roll over the money or take a lump sum payment. If you do not respond, the custodian will simply send you the lump sum payment, minus the 20 percent withholding fee and 10 percent penalty, if applicable.
The custodian of your 401k account likely has specific procedures for terminating 401k accounts. Typically, you may have to fill out a request and send it to the company by mail. Alternatively, you may be able to terminate the account over the phone. You can find out the details specific to your custodian through its website, or by calling customer service.
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