When you quit a job, you typically have to decide the fate of your 401k. In some cases, the idea of cashing the account out might be particularly attractive. However, if you’ve never had to do it before, you might worry that the process is complex. If you’re wondering, “Is it difficult to cash out a 401k when you quit a job?” here’s what you need to know.
What Happens to a 401K When You Quit?
Precisely what happens to your 401k when you quit a job can vary depending on rules relating to the account. In some cases, your investments can stay right where they are, and you can tap them when you reach retirement age without much difficulty or financial penalties.
However, rolling over the 401k into your new employer’s plan or an IRA is also an option. For accounts that don’t allow the money to stay with your last employer, then a rollover might be more of a necessity, suggesting you don’t cash out.
Cashing out is technically on the table, too. You’d receive a lump sum distribution based on the account balance or the amount that’s vested. While this may seem wise, if you haven’t reached retirement age, it will trigger financial penalties along with taxes.
Is It Difficult to Cash Out a 401K When You Quit a Job?
Generally speaking, it isn’t difficult to cash out a 401k when you quit a job. Once you formally leave the position, you typically have 60 days to take certain actions relating to the money, including requesting a cash-out. If you go that route, you’ll usually have to formalize your request in writing by completing some forms, and that’s typically the most difficult step.
However, withdrawing the money can trigger early withdrawal penalties. Along with the 10 percent penalty, you’ll be taxed on the amount you take out, which can potentially reduce the value of the withdrawal by 10 to 37 percent, depending on your tax bracket.
How to Cash Out a 401K After Quitting a Job
Cashing out an eligible 401k is pretty simple. Typically, you’ll need to contact the plan administrator and complete a few forms. Once that’s done, the administrator can usually send you a check for the value of the account.
Exactly how long it takes to receive the check can vary, though most will provide the funds within 60 days of the request processing. If you have questions about the timeline, you can request an estimate from the administrator.
Did you know what happens to a 401k when you quit a job? Do you think the process for cashing out is reasonably easy? If you’ve ever left a job, did you decide to cash out your 401k, or did you go another direction? Share your thoughts in the comments below.
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.