Ask Money

Cancel your 401(k)?

Marketplace Staff May 3, 2013

Question:

Is it possible to cancel my 401(k) without showing hardship?

Response:

Paddy Hirsch Aug 14, 2012 Senior Editor, Marketplace
Hi Curtis. The answer is, yes, you can. But…

This from TurboTax:
Unfortunately, you could pay a big price for withdrawing your funds: You will owe income tax on the amount you withdraw, just as you would had you withdrawn it in retirement. And, if you are under age 59-1/2 years old, you will probably have to pay a 10 percent early withdrawal penalty that’s included as part of your income taxes.

This from 401kcalculator.org:

  • You have several options regarding your 401(k) plan when you change employers.
  • You can choose to rollover your 401(k) account to your new employer’s 401k by telling your plan administrator. You will also have to complete some paperwork.
  • You can also elect to leave your 401k plan with your former employer, although this is not always recommended.
  • Your third option is to rollover your 401k into a new retirement savings plan such as an IRA.

This from TurboTax on the hardship issue:

  • Some plans let you withdraw money outright for certain financial and medical hardships before you reach that age, although they are not required to do so.
  • You can take a 401(k) hardship distribution if your plan allows it and you have what the IRS calls “an immediate and heavy financial need.”
  • Depending on your plan’s rules, the following needs could qualify:
  • Payment needed to prevent eviction from, or foreclosure on, your principal residence.
  • Certain medical expenses
  • Burial or funeral expenses
  • Cost of repairing damage to your principal residence
  • Cost of purchasing your principal residence
  • Tuition and related educational fees and expenses

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