How to Cash Out a 401(k)

Your 401(k) is intended to be used to provide for your golden years. However, you might not want to wait until then to cash out your 401(k). Depending on your circumstances, you may be able to cash out early, but it could cost you extra when it comes to paying taxes if you're younger than 59 1/2 years old when you empty the account.

Even though it's your money, you can't always access the funds in your 401(k) plan. To be able to take a distribution at all, you must be either over 59 1/2 years old, have left your employer, become permanently disabled or have a severe financial hardship and a plan that permits hardship distributions. If you're still working for the company and you're younger than 59 1/2, you're not allowed to cash out your 401(k). And, if you're under 59 1/2, you'll owe a 10 percent early withdrawal penalty unless an exception applies.

Each 401(k) plan custodian has its own withdrawal forms that you can get from your benefits coordinator. You'll need to provide your account information, how much you want to withdraw and how you want the money paid to you, such as via directly deposit or a paper check. If you're claiming a financial hardship, you'll need to submit documentation that supports your claim. For example, if you're claiming substantial medical bills, you'll need to include an invoice from the hospital.

When you cash out your 401(k), you'll owe income taxes on the distribution. At the end of the year, you'll receive a Form 1099-R that will show the amount of the distributions to report on your income taxes. The withdrawal counts as ordinary income, which means it's taxed at your ordinary income rates. For example, if you take out $10,000 and you fall in the 25 percent tax bracket, you'll owe $2,500 in taxes plus any early withdrawal penalties.

If you cash out your 401(k) before 59 1/2, you can avoid the early withdrawal penalty, but not the income taxes, if you qualify for an exception. There's an unlimited exception, which allows you to take out as much as you want without penalty, if you're permanently disabled. You also can take out enough to satisfy a qualified domestic relations order, to pay medical expenses that exceed 10 percent of your adjusted gross income or for an IRS levy on your 401(k) plan. To report your exemption, you must file Form 5329 with your income tax return.