I want to close my 401k, what is penalty and how do you go about closing it?

Question

It is a small amount of money under $4K, I need to pay off some debt to clear up some credit issues, so I can eventually buy a home next year. I will plan to re-open 401-k but since I will probably be leaving my job in the next few months, I'll just wait til then to re-start a retirement savings.

I could apply for the hardship for medical expenses and submit all the neccesary forms, but then when I get the money do you track if that is what you used it for?

Answer 1

You close it either by contacting your former employer or else the custodian of assets (the company that issues your statement). They will mail you a distribution package that you will need to complete (indicating your election to cash out or roll over). Then you just wait for the check.

Any amount you cash out will be seen as normal income. For example, if you make $30,000 in wages and you cash out $1,000, you will have to pay taxed on $31,000.

Any amount you cash out will be subject to a mandatory 20% withholding. So, if you have a $1,000 balance, you would receive a check for $800. That $200 would go to the IRS as an advance payment on your taxes.

You will receive an IRS form 1099 at about the same time as your W-2. (The IRS will receive a copy too, so no cheating.) You use this to show the IRS you have had a withdrawal from a 401(k) plan. This form will reflect the fact you have already paid $200. You file this form with your 1040 personal taxes.

Money in retirement plans are intented to be used for retirement income. If you withdraw it before age 59 1/2 you are penalized 10% on top of the taxes. This 10% amount, along with any additional taxes owed, would be due when your personal taxes are filed.

This is all assuming you are talking about a former employer. You are not allowed to withdraw 401(k) money frmo a plan sponsored by a company you currently work for unless there are hardship or loan provisions in the plan.

Hardships can only be taken to meet a specific need. Also, the amount withdrawn cannot exceed the specific need. This amount is subject to penalties and taxes. Hardships can only be taken if you still work for the company sponsoring the plan.

With loans you are allowed to withdraw up to 50% of your vested balance. You must then pay yourself back, with interest, via payroll deduction. Failure to pay the loan in full will result in a tax/penalty situation outlined above. Loans can only be taken if you still work for the company sponsoring the plan.

Answer 2

Here's the problem. If you have invested in any of the mutual funds that are based on the fund indexes, then you will have lost a bunch recently.

Number 2) there is a substantial tax penalty (10%) for pulling out the 401 k prematurely plus all the taxes that you had deferred. to begin with.

In addition, you forgo any possible increase in the worth of the account while the market recovers in future years. You will be taking away benefits that you will need when you get older.

To buy a home, if you are short $4000, then you may be able to borrow against the 401k but you should be talking to the plan administrator about this.

Of course, you will be paying interest back to yourself, but you will also be foregoing all the increases that you were looking to get when you set up the 401k to begin with.

Don't do it.

Answer 3

Don gave the correct penalty information. You'd be better off living on less for the next year or so and attacking the debt with the left over money and a part time job. Stop contributing to the 401K for now but roll it to a Roth IRA when you leave your job.

To get it early, a hardship may be required but your plan administrator can answer all that. You'll have to contact him (or her) to get the money anyway.

Answer 4

For the best answers, search on this site https://shorturl.im/sg4Ux

And people keep asking if they should move old 401(k) money into new 401(k) accounts. I think this unfortunate situation is reason enough that a person should take their money and pick their very own financial provider when given the opportunity. The "right" employers have that you are asking about is found in the Employee Retirement Income Security Act of 1974. Have you spoken with the financial institution that held the account? Did you play the sympathy card and let them know why you were closing the account?

Answer 5

You would go about it through your human resources at work expect a penalty of 50-60% so less than $2,000 that you will get. It is a bad idea as it will reduce your future monies. Something alternatively you may want to consider is taking a loan out on your 401k, you are essentially taking a loan out from yourself, once you pay that back you will be good and you didn't have to go through the hassle of closing your 401k

Answer 6

I don't think that you'll be getting much money back if you close it. You'll get hit up with all kinds of penalties for closing it before you retire. Call the company that takes care of your 401k and they can tell you.

Answer 7

Nadart 401k

Answer 8

You should contact the plan administrator. There will be a substantial penalty and tax consequence for closing the account. Some plans allow for a hardship withdrawal without closing the account. I'd check to see if I qualify for that first.

Answer 9

If you are under 59 1/2 years old you will pay a 10% penalty. You will also have to clain it as income and pay taxes and FICA on it. So on $4000 you would pay $400 in penalties and roughly $1200 in taxes provided you are in that tax bracket.

Answer 10

Best bet. Do not touch your 401K. Especially do not take out a loan on it because that may become due immediatley upon leaving your job. There are other ways to pay down debt but this is not a good one.